All investors love a good bargain where you can buy a stock for much cheaper than it's worth.
Bargain-shopping quality companies helps you avoid two of the costliest mistakes investors can make: overpaying for a strong performer and buying shares of a weak business that's not worth owning in the first place.
And the financial turmoil that's rattled Europe has meant even cheaper stocks. Over the past year, the P/E of the average member of the Dow Jones Industrial Average (INDEX: ^DJI ) has fallen from 15.3 to just 14.4 today. And that's despite an average 20% spike in profits.
To help you identify some potential opportunities for your portfolio, I built a screen to pick out the 10 biggest bargains in the Dow. I compiled all 30 Dow stocks and ranked them by order of their implied five-year stock returns from today, based on their dividend yields, projected earnings growth rates, and price-to-earnings multiples.
Below are the names of the 10 biggest bargain stocks in the Dow. Make sure you read to the end to find out which stocks I believe look the most intriguing.
Projected Earnings Growth
|2||JPMorgan Chase (NYSE: JPM )||2.8%||4%||7.5|
|3||Microsoft (Nasdaq: MSFT )||2.8%||7%||10.2|
|6||Intel (Nasdaq: INTC )||3.3%||6%||10.9|
|7||DuPont (NYSE: DD )||3.6%||7%||12.5|
Source: S&P Capital IQ. Projected earnings growth estimates are 60% of consensus estimates to adjust for historical rates of over-optimism.
Now, while the numbers tell us that these are the 10 biggest bargains in the Dow, that doesn't guarantee they'll necessarily be the best performers. We all know how analyst predictions can be flawed, or how investors may not immediately reward strong earnings performance with a well-deserved multiple.
So it's up to us to separate the best from the rest. Let's take a closer look at my four favorites.
Stock No. 1: JPMorgan
Like its "too big to fail" brethren Bank of America and Citigroup, JPMorgan is cheap. All three trade for well below book value, indicative of just how much scorn investors feel for the banking sector these days.
And why wouldn't they? The dangers facing the industry are many: a financial crisis in Europe, legal liabilities from banks' handling of the housing bubble and foreclosure bust, and financial reforms that will reduce fees and trading revenue -- all at a time of slow loan growth.
That said, finance will likely be an attractive industry once more, the stock is cheap, and JPMorgan is the best-run of the three.
Stock No. 2: Microsoft
The market is acting as though Microsoft is a relic. Over the past five years, shares haven't gone anywhere. Yet the tech giant continued to grow; over that same time frame, earnings per share nearly doubled.
The most dramatic growth is coming from its server and developer tools and business segments, as well as its burgeoning Xbox division, whose pre-tax profits doubled over the past year to cross the $1 billion threshold. But some two-thirds of the growth in Microsoft's earnings per share has come from its reduced share count. The stock is cheap, and management is using its enormous cash flow to buy back discounted shares.
Stock No. 3: DuPont
Chemical giant DuPont may offer a hefty yield, but its tantalizing dividends haven't come at the expense of growth. Earnings per share have grown at a healthy clip over the past half-decade -- despite the recession that contributed to overall earnings declines for peers Dow Chemical and Huntsman. DuPont made some innovative acquisitions over the past year, snapping up Innovalight, a paint maker whose products are used in solar panels, and Danish food-ingredients giant Danisco.
Stock No. 4: Intel
With three-quarters of Intel's revenue coming from PC chips and the increasing adoption of mobile devices over PCs in the developed world, investors wonder whether Intel has what it takes to break into a market dominated by the technology of British chip designer ARM, which is designing processors that could compete in Intel's server territory.
But I've said it before, and I'll say it again: Don't overlook Intel's advantages of scale. The chip giant dominates the PC market, spending more on research and development than ARM and AMD, its chief PC competitor, produce in combined sales.
The PC market is still growing, thanks in large part to demand from emerging markets, and Intel has the financial muscle to compete against its smaller rivals.
I think these four stocks have what it takes to outperform the Dow, but our chief investment officer selected a different stock as the No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this promising company.