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.

Dividend

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.

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