Are the 4 Cheapest Dow Stocks Really Good Bargains?

These Dow stocks have the lowest forward earnings multiples, but find out whether they actually give shareholders good value.

Jan 11, 2014 at 11:01AM

With the Dow Jones Industrials (DJINDICES:^DJI) still trading close to all-time record highs, you might think that you couldn't find any attractively priced stocks among the 30 components of the blue-chip benchmark. But when you look at their share prices compared to projections for future earnings, you can actually find a good number of stocks trading at reasonable valuations. Still, low earnings multiples don't always equate to good value, so let's take a closer look at JPMorgan Chase (NYSE:JPM), Chevron (NYSE:CVX), IBM (NYSE:IBM), and Travelers (NYSE:TRV) to see if their shares really are smart bargains or whether there's a good reason for them to fetch a lower valuation compared to their earnings.

At just 9.95 times next year's earnings, JPMorgan is the only stock in the Dow to have a forward P/E less than 10. Yet the real question for investors to answer with the Wall Street bank is whether earnings have hit a cyclical peak, or whether future earnings growth is actually realistic. Bearish investors have argued that regulation would essentially cap earnings power for JPMorgan well below its pre-crisis levels. But even modest growth would be enough to make JPMorgan stock look attractive at current prices, especially if the bank continues to raise its dividend and strengthen its balance sheet.


Source: 401(k) 2013.

Chevron weighs in at 10.4 times forward earnings estimates, but here, there's an even bigger concern that cyclical factors could shrink earnings in the near future. Just earlier this week, Chevron issued preliminary figures from its fourth quarter that showed production drops and falling realization prices for its upstream segment, causing the stock to drop in response. Oil prices have remained relatively high, but even slight deterioration in energy prices has hurt Chevron's profit potential. It'll take huge amounts of effort for Chevron just to maintain production levels, let alone grow them. That makes Chevron's valuation a bit more justified than some other cheap stocks.

IBM trades at 10.6 times projections for forward earnings, and even though the tech giant has suffered from falling revenue levels lately, so far, they haven't translated into a drop in earnings per share. Immense buybacks have played a big role in boosting earnings projections, with Big Blue still seeking $20 in earnings per share by 2015. Even though IBM faces plenty of challenges, bullish investors have high hopes for growth opportunities as the company keeps striving to lead in the data-analytics area as well as cloud computing more broadly.

Travelers had a good 2013, thanks largely to a lack of major loss experience after two previous years of harsh storms. Few expect 2014 to go as well as 2013 did, making forward earnings projections somewhat misleading in terms of long-term earnings growth. The big question for Travelers is whether rising interest rates will hurt its bond investment portfolio more than higher yields will help its overall income. Still, until the next bad storm hits, Travelers looks like a solid pick in the insurance industry.

Be smart with value
It's never enough just to look at earnings multiples without assessing growth prospects and other fundamentals. For these Dow stocks, varying levels of promise make them appropriate for different investors, depending on your risk profile and time horizon.

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Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Chevron and owns shares of IBM and JPMorgan Chase. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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