The Cheapest Stocks in the Dow

Many people (including investors) don't realize that the Dow Jones Industrial Average (INDEX: ^DJI) is made up of the stocks of just 30 companies. That's it -- 30.

Yet these 30 stocks make up more than a quarter of the total market value of the entire U.S. stock market!

These are big, important companies that, taken together, are integral to our economy and will be for years to come. And they're cheap!

Why? Because when you hear about the "lost decade" of close-to-zero returns over the last 10 years, it's these companies folks are talking about.

Yet while the stocks of the Dow haven't done much, many of their actual businesses have exploded. The result is that the 30 stocks in the Dow are now cheaper than the rest of the stock market.

Keep reading and I'll show you a table of all 30 Dow stocks, ranked by how cheaply they're trading. Then I'll highlight a few that look especially attractive.

Here's how cheap they are
To assess cheapness, we could look at trailing P/E ratios, but these only look at one year's worth of performance. Instead, let's use a five-year P/E ratio. In other words, today's price divided by the five-year average of earnings. Looking at five years balances the need to include good years and bad with the need to include timely data.

To put the numbers you're about to see in perspective, a regular one-year P/E ratio under 15 is pretty attractive. Seeing nearly half the Dow stocks with five-year P/E ratios under 15 is mouthwatering.

Source: S&P Capital IQ.

Looking down the list, I want to highlight two areas of the market: financials and tech. First, financials.

It may surprise you that JPMorgan and Bank of America have enough earnings power to support such low five-year P/E ratios. Remember, these earnings include all the write-offs they've been taking on their bad loans and derivatives due to the financial crisis. We also see low ratios for insurance giant Travelers and conglomerate GE, whose financial division terrified investors during the crisis.

I continue to think the financial sector is beaten down more than it should be due to the real risks involved with opaque balance sheets. Grabbing individual stocks in the financial sector isn't for everyone, but personally I own shares of JPMorgan and Bank of America.

Less opaque but still hard to predict is the tech sector. We see big tech players HP, Microsoft, and Cisco all trading for five-year P/E ratios under 15. Their balance sheets aren't the problem (in fact, Microsoft and Cisco have massive net cash balances), but investors are discounting the giants because competitive advantages in tech can disappear painfully quickly. Remember, Facebook is only seven years old.

That said, I personally own shares of Microsoft and Cisco because I think they're being written off too quickly. Meanwhile, HP remains on my watchlist because of its bargain-basement valuation, but so far I'm staying away because I'm not yet convinced they're operationally sound enough to warrant an investment. I don't know what the future of tech will hold, but at these prices, I'll take my chances with Microsoft and Cisco.

The bottom line
I highlighted the financial and tech sectors because of their especially low valuations, but the entire Dow list is a great place to start if you're looking for ideas. Even the most expensive stocks on the list aren't trading at insane multiples. For more detailed research, five of the 30 Dow stocks made the cut in our new free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." I invite you to take a free copy. To find out the names of the five stocks, just click here.