The Dow Jones Industrial Average (Dow Jones Indices: .DJI) sits above 15,000, an all-time high. But don’t be fooled, this doesn’t mean that stocks are expensive. I understand that it seems logical to assume that if the Dow Jones industrial average, what many believe to be the bellwether index of the stock market, is at an all-time high, then it must simultaneously be overvalued. Herein is the danger of relying on headlines and simple statistics.
This article intends to demonstrate that more than one third of the 30 Dow Jones Industrial Average (Dow Jones Indices: .DJI) stocks (11) are undervalued, another 6 are fairly valued, another 6 fully valued, but not overly so, and finally, only 7 that could rightfully be classified as overvalued. In other words, the Dow Jones industrial average is rather cheap, even though it sits near an all-time high.
But as I often like to say, “The Angels are in the details.” The beauty of an index with only 30 constituents is that the details are relatively easy to review. What follows is a breakdown of the 30 Dow Jones Industrial Average (Dow Jones Indices: .DJI) in order of valuation, lowest to highest. The 30 constituents will be organized according to the four categories depicted above: first the 11 that are undervalued, followed by 6 that are in value, followed by 6 more that are fully valued but not overly so, and finally by 7 that appear overvalued.
I will provide a “F.A.S.T. Graphs™ portfolio review” for each category listing the current P/E ratio, the company’s historical normal PE, each company’s 15-year historical EPS growth rate, the consensus estimated 5-year growth rate, followed by the 5-year estimated annual total return based on those estimates, then the dividend yield, sector, market cap, and finally their debt/capital ratio.
Then I will provide a 15-year earnings and price correlated F.A.S.T. Graphs™ on each company. My objective is to provide the reader a greater insight into what the Dow Jones industrial average truly looks like relative to fair valuation over what they could obtain by simply reading provocative headlines.
In addition to a focus on the current valuation of this bellwether index, I hope that the reader walks away with a more comprehensive understanding of the nature of the 30 businesses that make up the Dow Jones industrial average. This large-cap index contains many types and categories of common stocks. It is comprised of growth stocks, dividend growth stocks, cyclical stocks, turnaround situations and everything in between.
Moreover, each constituent is a bellwether of its own respective industry in its own right. It all adds up to quite a feat for such a small number of companies. Nevertheless, this index has historically represented itself quite admirably as a proxy for the state of the market and the US economy at large. I am hopeful that the reader walks away with a much clearer perspective and opinion about the stock market, and stocks in general, as a result of reviewing the Dow Jones 30 industrial average, one company at a time.
Dow Jones Industrial Average Constituents Undervalued
As I previously indicated, there are 11 of the 30 Dow Jones Industrial Average (Dow Jones Indices:.DJI) stocks that appear to be undervalued even after the recent market run-up. What comes next is first a portfolio review of these 11 companies, followed by an individual earnings and price correlated F.A.S.T. Graphs™ on each. The reader should note that each of these individual earnings and price correlated historical graphs contain a forecast for the current fiscal year’s earnings. This will be marked by a capital “E” for estimate next to the dollar amount of earnings forecast for the next fiscal year listed at the bottom of the graph.
When reviewing the individual graphs, the orange line represents a metaphor of fair value based on widely-accepted formulas for valuing a business. Notice how the monthly closing stock price (the black line on the graph) tracks the orange earnings justified valuation line on each individual constituent’s graph. Even the most cyclical of the Dow stocks will show a high correlation between the company’s stock price and its earnings over time. Whether the earnings go up, down or sideways, stock price will follow. Moreover, when price and earnings become disconnected, notice how they inevitably move back into alignment with each other.
Hewlett-Packard Company (NYSE:HPQ)
Microsoft Corporation (NASDAQ:MSFT)
JPMorgan Chase & Co (NYSE:JPM)
Cisco Systems, Inc. (NASDAQ:CSCO)
United Health Group Inc (UNH)
Intel Corp (INTC)
International Business Machines Corp (IBM)
Caterpillar Inc (NYSE:CAT)
Chevron Corp (NYSE:CVX)
Exxon Mobil (NYSE:XOM)
Dow Jones Industrial Average Constituents In-Value
This next set of six Dow constituents are all trading at theoretical fair value bringing the total to 17, or more than half of the 30 Dow Jones industrials that are either undervalued or fairly valued. The following portfolio review, and all subsequent portfolio reviews are presented with the same information as we saw with our 11 undervalued Dow constituents.
Once again, when reviewing the individual graphs, the orange line represents a metaphor of fair value based on widely-accepted formulas for valuing a business. Notice how the monthly closing stock price (the black line on the graph) tracks the orange earnings justified valuation line on each individual constituent’s graph. Even the most cyclical of the Dow stocks will show a high correlation between the company’s stock price and its earnings over time. Whether the earnings go up, down or sideways, stock price will follow. Moreover, when price and earnings become disconnected, notice how they inevitably move back into alignment with each other.
However, in contrast to what we saw with our first 11 undervalued examples where the black monthly closing price was below the orange earnings justified valuation line, with this set of 6 fairly valued companies we see the price approximately touching the orange line indicating fair value. On the other hand, the concept of fair value means different things for the individual companies in this subset.
For example, today’s fair value for General Electric (NYSE:GE) is based on a resetting of earnings growth created by the great recession caused by the financial crisis of which General Electric was a major player in. In the case of DuPont (DD), we see earnings growth that has been both highly cyclical, yet flat. American Express (AXP) shows a strong recovery in earnings while Walmart’s (WMT) stock price has been tracking earnings justified levels after experiencing a significantly long period of overvaluation. In the case of the two big pharma’s, Pfizer (PFE) and Merck (MRK), both appear fairly valued based on expected earnings acceleration for fiscal 2013.
General Electric Co
American Express Co
Wal-Mart Stores Inc
Merck & Co
Dow Jones Industrial Average Constituents Fully Valued
There are an additional 6 of the 30 Dow Jones industrial average constituents that I would call fully valued, but not dangerously overvalued. In other words, although the stocks