Thus far, with the first 3 parts of this five-part series, we’ve examined 60% (18 of 30) of the 30 stocks in the Dow Jones Industrial Average. What we found so far were that the majority of these constituents are currently overvalued or at least fully valued.
Finally, with this Part 4, we will examine 6 additional Dow constituents that appear fairly valued with blended P/E ratios of 14-16.
But as the title of this article asks, why are these 6 Dow stocks trading within the historical normal valuation range of the market when the others are being valued much higher?
In other words, are they cheaper for good reason?
Portfolio Review: Six Fairly Valued Stocks in the Dow Jones Industrial Average
The following portfolio review lists 6 stocks in the Dow Jones Industrial Average that appear fairly valued based on their current blended P/E ratio. However, there are many ways to value a stock in addition to the P/E ratio. Consequently, I suggest the reader also notices the price to cash flow of each of these 6 Dow constituents.
For those investors most interested in dividend income, price to cash flow might be more relevant for higher-yielding dividend paying stocks. Furthermore, when ascertaining valuation, other factors such as expected growth need to be considered as well. I will elaborate more fully in the video below.
The following portfolio review is presented in order of highest blended P/E ratio to lowest. As an additional valuation check, note that the earnings yield (EPS Yld) of each of these Dow constituents is above 6%, but only 3 of 6 are above my 6 ½ to 7% threshold. Consequently, this particular group of 6 Dow stocks is more attractively valued than what we’ve seen in previous parts of this five-part series. On the other hand, these 6 Dow stocks are not necessarily bargains at current levels either.
FAST Graphs Analyze Out Loud Valuation Analysis
This video will present a quick overview of each of these Dow constituents based primarily on price relative to earnings and cash flow. However, for certain constituents, I will also evaluate other metrics. For any reader concerned with the current valuation of the stock market, this video, and the videos in Part 1, Part 2, and Part 3, as well as the next and final video that will follow in Part 5, are must watches. Furthermore, although I will be only providing a cursory, or a pre-more comprehensive due diligence analysis, I believe you will find the video enlightening and hopefully entertaining.
Summary and Conclusions
We have now reviewed 80% (24 of 30) of the Dow Jones constituents. From my perspective, what we have discovered is an index that is richly valued relative to fundamentals. On the other hand, there are only a handful of Dow stocks that might be considered dangerously overvalued. All of the dangerously overvalued constituents were found in Part 1 and Part 2 of this series.
However, as we have progressively moved through the Dow constituents, the valuations were more in line with sound fundamental value. In this Part 4, we saw 3 constituents that appear fairly valued, with the other 3 only moderately overvalued relative to fundamentals.
However, these valuation statements do not simultaneously imply that these stocks in Part 4 are great investments. In addition to fair valuation, investors must also consider the prospects for each individual company’s future growth potential. You can have two individual companies trading at similar P/E ratios that respectively provide significantly different potentials for future returns.
In other words, the company with the highest potential growth will be the better long-term investment in spite of similar current valuations. Current yield and dividend growth potential will also make a difference. Income investors might prefer the higher yield, while total return investors might prefer higher growth potential.
In Part 5, I will be reviewing the following Dow stocks: Cisco Systems Inc., DuPont Inc., The Goldman Sachs Group Inc., International Business Machines, Intel Corporation and Verizon Communications Inc.
For the reader’s convenience, here is a link to Part 1-The 6 Most Expensive Stocks, Part 2-6 More Expensive Stocks and Part 3-Are These The 6 Best Stocks?
— Chuck Carnevale
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Source: FAST Graphs
Disclosure: Long GE,PFE at the time of writing.