The 10 Worst Dow Stocks to Buy?

Earlier, I wrote about The Dow's 10 biggest bargain stocks -- those names that, based on their P/Es, estimated earnings growth, and dividend yields, have the highest implied returns among members of the Dow Jones (INDEX: ^DJI  ) .

But what about the others? What about the stocks with the lowest implied returns? Well, here they are:

Rank

Company

Dividend 
Yield

Estimated 
Earnings 
Growth

P/E

29 Pfizer (NYSE: PFE  ) 4.2% 2% 19.1
28 Merck (NYSE: MRK  ) 4.4% 2% 19.1
27 Johnson & Johnson 3.5% 4% 18.6
26 Kraft (NYSE: KFT  ) 3.1% 6% 20.7
25 Alcoa 1.2% 6% 18.4
24 Coca-Cola 3% 6% 18.7
23 Procter & Gamble 3.2% 6% 19.1
22 Travelers 2.7% 5% 17.8
21 McDonald's (NYSE: MCD  ) 2.8% 6% 19.0
20 Chevron 3% 0% 7.9

Sources: S&P Capital IQ, author's calculations.
*Excludes Bank of America, which didn't generate trailing earnings.

What jumps out most about this list is the valuations. Almost of these names trade at valuations above the Dow's median P/E of 16, even though their adjusted earnings-growth estimates tend to only meet or trail the median adjusted estimated growth rate of 6%.

That's not to say that this list will necessarily underperform the Dow -- after all, analysts can make mistakes. (That's why I adjusted all 30 of the growth estimates downward by the historical analyst margin of error -- 40%.) But it bears worth looking into.

Pharma giants Pfizer and Merck may carry huge dividend yields but have anemic estimated earnings growth. What worries analysts is their pipeline cliff. With big names like Pfizer's Lipitor and Xalatan off-patent, there's a $15 billion revenue hole that needs to be made up. Completely independently, fellow Fool Sean Williams recently made a convincing case for Pfizer as his pick for the Dow's worst stock. Meanwhile, Merck has made some strides in its pipeline-replacement attempts. While its top asthma drug, Singulair, could see generic competition as early as this August, it's applying for FDA approval of eight new drugs over the next two years. Still, that doesn't guarantee approval or commercial success -- Merck's hepatitis C drug Victrelis hasn't fared too well.

Kraft is another name that could make sense on this list. As I noted yesterday, Kraft trades at a valuation that reflects preferences among "defensive" investors. Should the economy continue turning around, we could see that change as higher-growth names become more popular.

I'm somewhat less skeptical of names like Coke and McDonald's. Yes, the Golden Arches' valuation may seem a bit high, but compared with some of the other names on this list, like retailer Kraft, there should be no contest. Analysts are predicting similar growth rates (around 9%) for these two companies, yet Kraft produced only 4% annual growth over the past five years, while McDonald's grew at a 16% rate and still has lucrative growth opportunities in emerging markets like China, which has helped to fuel its growth in the past.

Don't just look at where a stock or company has done in the past. And don't rely exclusively on analyst growth estimates, but dig deeper into the threats -- and golden opportunities -- belonging to your companies. If you'd like some help, take a look at one stock that our chief investment officer picked to crush the market in our brand-new report, "The Motley Fool's Top Stock for 2012." It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company for free

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Johnson & Johnson and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Procter & Gamble, Pfizer, McDonald's, Johnson & Johnson, and Chevron and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (5) | Recommend This Article (53)

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 February 20, 2012, at 10:24 AM, kls37 wrote:

    Funny how the analysis works. Only 2 weeks ago

    KO was #9 in the best 10 list. Generally a large blue chip company doesn't go from best to worst in 14 days. Unless this was an error, how can one place any credence on the articles?

  • Report this Comment On February 20, 2012, at 11:03 AM, jjbigslix wrote:

    I was going to ask pretty much the same question- How can Coke be on both the 10 best and 10 worst lists at the same time?

  • Report this Comment On February 21, 2012, at 12:32 AM, MichaelDSimms wrote:

    Take these atricles with a gain of salt. And there are far worse stocks to own in the stock market.

  • Report this Comment On February 21, 2012, at 11:03 AM, pondee619 wrote:

    kls37 & jjbigslix:

    Because the Fool hires writers to work both sides of the street. You can not read the fool pages to get a consistent idea of an issue. So much like the weather on Cape Cod, of you don't like it, wait a while, it will change. You will not get AN opinion on a stock on these pages. You will get ALL possible opinions on a stock here.

    The question I have is why isn't the worst, anticipated, stock in the Dow # 30? Shouldn't the ten worst of a 30 stock index be numbered 30 to 21?

    Also, in an article about "The 10 Worst Dow Stocks to Buy" what is this line trying to say: "That's not to say that this list will necessarily outperform the Dow "? Shouldn't this list be expected to underperform the Dow?

    Methinks we have been subjected to another very poor cut and pasted job by a fool writer.

    And yet 50 fools believe that this article warrants a rec. If you accept trash, you get trash.

  • Report this Comment On February 28, 2012, at 11:43 AM, TMFDiogenes wrote:

    Thanks for commenting, everyone.

    Thanks, pondee, I misspoke. Apologize -- you're correct that I meant to say underperform. We've changed that.

    Foolish writers are free to write differing opinions -- that's the Motley part. We think that free and open debate is preferable to towing a single prescribed line.

    Kraft wasn't on my 10 best best list: http://www.fool.com/investing/general/2012/02/05/the-dows-10...

    Coca-cola was on the best list a few weeks ago, but after reporting lower earnings, its P/E expanded significantly, putting it on this list. Those sorts of earnings fluctuations are one of the reasons why I stated in the article that you have to take any sort of mechanical screen with a grain of salt and that I was less skeptical of some of the names that included Coke. So I agree -- screens should be a starting point for further analysis and research -- some of which I provided in this piece -- they're not the final answer.

    As the footnote to the table indicates, the list goes through #29 since BAC has negative earnings and isn't eligible.

    And yes, MichaelID, I agree there are far worse stocks to own in the stock market. These are just among Dow stocks.

    Fool On!

    Ilan

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