Here we are again, ready to tackle five more of the Dow stalwarts. This group brings us two-thirds of the way through our tour of the index, and it has been a fun ride so far.
Looking across the Dow, we still find that the majority of the index is reasonably priced. We would be happy to pounce on a number of companies if their share prices fell by 10% or less. This is just our somewhat clever way of saying that many companies are affordably priced but just a little bit above where we feel we're getting a decent margin of safety.
So, without further delay, let's dive into our next five Dow divas.
Honeywell International
NP: I've been digging for something positive to say about Honeywell, but I've pretty much come up empty. The company does have decent free cash flow, and its aerospace business is solid, but the shares are fully valued here, and there isn't the same yield or hint of greater things to come that you get with General Electric. If you want to own a conglomerate in the Dow, I think GE, Motley Fool Inside Value pick 3M, and United Technologies all deserve to be higher up on your buy list.
SS: I've been seeing value of late in cyclical companies, conglomerates, and companies in mature industries, but I'm not an especially big fan of this company, which basically combines all three. A cyclical upturn might boost near-term performance, but this is a company with a pretty clear record of mediocre performance, and the current stock price amply rewards that.
Intel
NP: When we started this series, Intel was fairly cheap and, given its strong free cash flow, still is reasonable. I'm a bit concerned by the headway that Advanced Micro Devices has made in the past three years, but despite AMD's gains, Intel's overall business remains strong. The fact that Apple Computer
SS: Intel may be inside my computer, but it's not inside my portfolio. Before tackling this piece, I didn't really give much thought to it ever being there. While I'm not yet making too much of the rumblings concerning the competitive inroads AMD is finally making into Intel's business, there has been a higher-than-usual number of negative stories (inventory accounting issues, slowing computer market growth, etc.) on Intel lately.
Say what you will about this company, but it has an enviable history of delivering the goods when it comes to earnings and cash flow growth. Competition may scratch up the paint job from time to time, but the cash flow engine looks sound, and I'm surprised to find that Intel may be more of a bargain than I first assumed.
IBM
NP: I'm well aware that IBM and Honeywell are very different companies with different competitive positions, but I have some of the same feelings about IBM that I have about Honeywell. If I'm going to invest in technology, I just don't find the safety of IBM's diversification that attractive at current prices. Instead, I'd rather buy my way into Inside Value pick Microsoft
SS: What exactly is IBM these days? Is it a computer company? A software company? A consulting company? Whatever it is, the company generates very good returns on capital and is often treated (rightly or not) as a bellwether tech stock that's safe for the fabled widows and orphans. The stock seems fairly valued to me, but it might be a good one to look at after a market freak-out.
Johnson & Johnson
NP: A couple of weeks ago, I seriously considered rearranging the order of this series in order to purchase shares of Johnson & Johnson without running afoul of the Fool's trading guidelines. Instead, I decided to take my chances and wait until after the series ran and hope I could still get shares in the $60 range. It looks like the company's recently renegotiated deal with Guidant may have spoiled my opportunity to get shares for $60, but let's see. With the diversification of the business, its history of growth, a dividend yield over 2%, and a reasonable valuation, J&J is my favorite opportunity in the Dow.
SS: This giant one-stop shop for health care is undergoing some changes. Not only has the performance in the pharmaceuticals business been a bit disappointing, but also the purchase of Guidant will further increase the role of medical devices in the overall picture. Over the long term, I'm OK with that -- in my experience, medical devices produce almost as good returns as pharmaceuticals, but with a higher degree of success and predictability.
Health care is a very large part of our economy, and I think J&J is the best Dow play for that sector. What's more, unlike with many other Dow stocks, the health-care business is not inherently cyclical, and patents can help produce and protect some pretty substantial margins and cash flow.
JPMorgan
Chase
NP: A number of value and dividend-oriented investors are interested in JPMorgan Chase this year, and with good reason. The company has continued to improve and stabilize its business, but its stock price has remained flat to slightly down most of the year. In fact, our own Mathew Emmert of Motley Fool Income Investor recommended JPMorgan shares a few months ago, and subscribers are already enjoying a nice return. Shares are trading for around $38, and I've seen analyst price targets between $42 and $46 per share. With its 3.6% dividend yield and shares undervalued by 10% to 20%, JPMorgan looks like the best-priced financial in the Dow.
SS: You can argue that other Dow stocks are better, and it's certainly true that others are cheaper. Nevertheless, JPMorgan may well be the best value of the bunch. With operations in retail and commercial banking, investments, and credit cards, JPMorgan is a global all-around play on finance. Sure, financial stocks aren't too popular these days, and the yield curve could get even worse, but over the long haul, I think this will be prove to be a good price for a good company.
Foolish final thoughts
I think it's fair to say that we're both pleasantly surprised by Intel and its free cash flow generation. Both of us also like J&J and JPMorgan, particularly at today's prices. Unfortunately, the same can't be said for Honeywell and IBM, though I (Nate) am a bit more negative about these companies than Stephen is. Still, this group of five might be the most intriguing group in the Dow, and it's certainly the most intriguing one we've looked at thus far.
I hope this tour through the Dow has been as rewarding for you the reader as it has been for us. We both have come away able to confirm some ideas and be pleasantly surprised by others. Of course, these are only two Fools' opinions -- your mileage may vary, and it's absolutely essential for you to do your own due diligence and make your own decisions.
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Fool contributor Stephen Simpson owns shares in Johnson & Johnson. Nathan Parmelee owns shares in Microsoft. The Motley Fool has a disclosure policy.
