6 Fairly Valued Dow Stocks: Part 4 of 5
Chuck Carnevale | Oct 19, 2017 11:01AM ET
In part 1, part 2 and part 3 of this five-part series, we’ve examined 60% (18) of the 30 stocks in the Dow Jones Industrial Average. What we found so far is that the majority of these constituents are currently overvalued or at least fully valued. Now we'll 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 valued much higher? In other words, are they cheaper for good reason?h3 6 Fairly Valued Dow Stocks/h3
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.
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 parts 1, 2 and 3 are must watches.
h3 Conclusions/h3We 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 the first 3 parts of this series. However, as we have moved through the Dow constituents, their valuations have been more in line with sound fundamental value. In installment, we saw 3 constituents that appear fairly valued, with the other 3 only moderately overvalued relative to fundamentals.
Get The News You Want
However, these valuation statements do not simultaneously imply that these stocks 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 look at the following Dow stocks: Cisco Systems (NASDAQ:CSCO), DuPont (NYSE:DWDP), Goldman Sachs (NYSE:GS), International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ).
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.