Twenty down, 10 more Dow stocks to go. We've already found some interesting bargains, as well as some stocks that we wouldn't touch with a 10-foot ticker tape. You can read all of the highlights -- and lowlights -- here, here, here, and here.
For the benefit of those who may be new to the series, this is a brief look at the investment prospects of all 30 Dow stocks. Nathan and I often banter amongst ourselves about stocks that look either quite promising or ridiculously overvalued, and we decided to share some of that back-and-forth with you, our readers.
The impetus for this piece came from the notion that we both started noticing that more and more Dow stocks were creeping into our "buy" zones. That's a rare occurrence for two Fools who spend more of their time frolicking amidst the small and unknown companies of the global stock markets. Nothing here constitutes a buy or sell recommendation, nor is it meant as a complete treatise on the merits of the companies. Rather, we're simply sharing some initial thoughts about these large companies and trying to finger those that look ripe for the picking.
So without further ado, here come the next five.
McDonald's
SS: Despite some really unfortunateluck at the CEO spot in the past few years, McDonald's has turned itself around quite nicely. Not only has the company worked to improve its menu offerings (including products that have more appeal with adults), but improved service has been a point of focus as well. So far, that seems to be translating into better sales and better profits. Hey, better customer service equals better performance . who knew?
This is an iconic American brand, and I think there are still a lot of opportunities overseas. In the meantime, the company has a pretty good return on invested capital, and the valuation isn't bad. I'd be a lot more interested in the stock if it were below $30, but I can't say that I dislike it today.
NP: Here's an odd thought: McDonald's has almost tripled from its lows in 2003. Funny thing is, the company still doesn't look terribly expensive today, as long as it can continue to churn out 5%-10% earnings growth. It's also priced reasonably in comparison with Wendy's and Yum! Brands. There's not tremendous growth available here, but there is room for some growth domestically and internationally. In addition, the company has room to raise its dividend from its current 2% yield.
Merck
SS: If ever there were a stock bedeviled by headline risk, it's Income Investor pick Merck. The questions about what the company knew about Vioxx and/or should have known, plus the real and perceived dangers of the drug, will all be hashed out in courtrooms across the country for years to come. Not helping matters is that the pipeline won't come to the rescue in any big way until about 2008 or so -- unless the company makes a bold move before then.
And that's part of the problem here -- I'm not sure that the board picked the right person for the CEO slot. I have nothing against the man, but I'm not sure he's inclined to any sort of bold moves or outside-the-box thinking that would get the company on its feet more quickly. The 5% dividend is large and seems safe for the time being, and I think the stock could be interesting for long-term investors, but I'd wait for the stock to dip on future bad news before buying.
NP: As much as I like Merck's 5% dividend yield, I'm not quite ready to touch the shares. Quite honestly, I feel more comfortable with Pfizer and its prospects, despite its slightly lower 3.5% yield. However, should the news surrounding the Vioxx trials turn more negative again and Merck trends back toward a 6% dividend yield, I'd have to re-evaluate whether the shares are worth the risk.
Microsoft
SS: Inside Value pick Microsoft has taken some flak for being in a lull lately. Frankly, I find that criticism to be almost funny when you consider that the downturn in technology markets killed or maimed many companies -- including some fairly sizable ones. This company, though, still has an effective monopoly position in many markets and a very healthy return on invested capital.
I don't disagree that the company needs to reinvigorate itself, and perhaps that will require some sort of voluntary breakup. Even if that doesn't happen, though, I think the shares are a pretty interesting value right here and now.
NP: Microsoft does face some solid competition in parts of its business from Red Hat
Pfizer
SS: Although Inside Value pick Pfizer is currently in some trouble, I think its sheer size will help it navigate through the tough times. An enormous asset base and cash flow generation capability gives it the resources to buy what it can't necessarily develop -- allowing it to strike deals like those we've seen with Vicuron Pharmaceuticals and Incyte
Current guidance is a mess, and the company is blathering about cost-saving initiatives. Nevertheless, people want life-improving drugs, and they'll pay for them (even if they complain as they do). Pfizer isn't going to turn around quickly, but patient investors might want to take a look and run their own valuation numbers. I don't think the stock is going anywhere in a hurry, but I do think there's a better-than-fair chance we'll look back in 10 or 15 years and say, "It got that cheap?"
NP: Pfizer flat-out looks cheap to me. There is the huge looming risk of Lipitor coming off patent in five years, and things are by no means pretty now. But I just confirmed with Fool colleague Charly Travers that the company has more than 200 drugs in its pipeline. Then there are the strong financials, which are topped off with a 3.5% dividend yield for taking on the current uncertainty. Pfizer isn't a guaranteed return, but it's one of my 10 favorite opportunities in the Dow.
Procter & Gamble
SS: In my book, P&G is one of the stalwarts of day-to-day life. Soap, paper towels, coffee -- we buy these things no matter what happens with energy, hurricanes, politics, and so on. Couple that with popular brands that have to be purchased over and over again, add in some very good management, and you have a definite long-term winner.
In my mind, the only issue regarding this stock is timing. I think you want to buy P&G when people are going nuts about the "new new thing" or thinking the economy is roaring and will never slow down. After all, who wants a soap company when you can buy Sell-At-A-Loss.com or Nano-Blech Inc.? Still, it doesn't seem overpriced today, so you don't necessarily have to wait.
NP: I think that everybody needs a P&G-type investment in their portfolio. Not necessarily P&G itself, but a company that offers consistent sales and earnings growth regardless of the economic environment. The trick is to buy the stock when boring consumer nondurable companies are out of favor on Wall Street. P&G's price is a little bit attractive now and about 10% away from being very attractive. Whether we'll see that better price is another matter, but I have my fingers crossed.
Foolish final thoughts
In some respects, this might be the most promising group we've seen to date. We may not have seen any really compelling buys, but we agree that each and every one of these companies is well-run and, if not a buy today, at least not overvalued. Factor in just how far the pharmaceutical industry has been laid low, and it's possible that this set of five could be the Dow's best performers over the next 10 years.
Remember, though, that these pieces are simply where your due diligence starts, not where ours ends. We may both think Microsoft is a buy, but that doesn't mean it is automatically so. Use these pieces in the same way that Nathan and I use our daily stock banter -- as points of departure for your own research and an idea-generation tool.
Fool on!
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Microsoft and Pfizer are Motley Fool Inside Value recommendations. Merck is a Motley Fool Income Investor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned. Nathan Parmelee owns shares in Microsoft. The Motley Fool has a disclosure policy.
