The Dow's 10 Biggest Bargain Stocks

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.

Rank

Company

Dividend Yield

Projected Earnings Growth

P/E

1 Caterpillar 1.9% 13% 14.6
2 JPMorgan Chase (NYSE: JPM  ) 2.8% 4% 7.5
3 Microsoft (Nasdaq: MSFT  ) 2.8% 7% 10.2
4 Hewlett-Packard 1.8% 5% 8.0
5 Alcoa 1.3% 6% 9.6
6 Intel (Nasdaq: INTC  ) 3.3% 6% 10.9
7 DuPont (NYSE: DD  ) 3.6% 7% 12.5
8 General Electric 3.6% 9% 15.1
9 Disney 1.5% 10% 15.8
10 American Express 1.5% 7% 12.2

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.

Ilan Moscovitz owns shares of Disney but no other company mentioned. The Motley Fool owns shares of Bank of America, Citigroup, Intel, JPMorgan Chase, and Microsoft. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Microsoft, Intel, and Walt Disney. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a written covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (125)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2012, at 3:00 PM, funfundvierzig wrote:

    Notwithstanding all the hoopla and hype coming from DuPont executives and their PR flacks, we simply don't find it that exciting that DuPont Senior Management has invested a whopping $7 billion in a run-of-the-mill food additives maker based in Europe or has made a huge bet on the solar industry. As readers know the global solar business is intensely competitive, and players have begun to drop out left and right, with more than one recent bankruptcy.

    ...funfun..

  • Report this Comment On January 10, 2012, at 3:49 PM, bherber wrote:

    Fun Fun,

    Considering all of DuPont's products, the amount of money allocated to solar was very minute as a percentage. In fact, it may have had tax advantages.

  • Report this Comment On January 10, 2012, at 9:35 PM, funfundvierzig wrote:

    bherber,

    When Reuters reported the purchase of Innovalight, Inc by DuPont on July 25, 2011, DuPont's PR-driven Management boasted of selling $2 billion of solar products yearly by 2014. That is a major bet on this increasingly problematic industry. ...funfun..

  • Report this Comment On January 13, 2012, at 1:33 PM, cubiefool wrote:

    JPM, BAC, CITI are good investments?

    All three have very questionable accounting of what they have on their books. Thats why the stocks of all three are beat up. Investors are not punishing banks with low PE's, we just don't trust any banks at the moment!

  • Report this Comment On January 13, 2012, at 4:31 PM, dogintrouble wrote:

    Echoing cubifool's note, the proper term for the banks' book values are either "imputed book value", or "presumed book value", or, to be kind, "unadjusted book value". Now, if they discounted their mark to maturity values, not to the capricious market value, but to the percent of loans in their portfolio that are CURRENT (less than 45 days behind), then we'd have something to judge. Without the percent of CURRENT loans factored in, the book value is an invalid metric ,and hence, so is Price-to-book.

  • Report this Comment On January 17, 2012, at 3:07 AM, CU786 wrote:

    Dow30 as an investment universe has always held an aurora for me. I welcome this effort. Infact, my suggestion is to have an exclusive place for them on your website.

    I am an investment advisor and my clients have always felt very safe investing in Dow30 even if the returns have not been that fascinating.

    Let me also express an investor's sorrow on not having Kodak anywhere near on this list. But cheers to equally good ones not having made it on this article, specially xom.

  • Report this Comment On January 18, 2012, at 8:58 PM, Netteligent09 wrote:

    We never invest anything from DOW.

  • Report this Comment On January 19, 2012, at 1:45 PM, gos82 wrote:

    @CU786 where do you work as an investment advisor, i would like to know because i am never going to invest anything with your company.

    Kodak a good buy? they went bankrupt today! how much (other people's) money did you blow with that advice, lol.

    ontopic

    Where is nokia on that list?

    /ontopic

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