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5 Dow Stocks at Discount Prices This Summer - 23183 views
BALTIMORE (Stockpickr) -- The recent pullback in stock prices has spurred investors into giving stocks a second thought this month. Yes, major indices such as the Dow Jones Industrial Average and the S&P 500 are sitting on meager single-digit gains year-to-date thanks to June’s strong selling, but stepping away from stocks right now is a big mistake. There’s substantial value in blue-chip names right now -- and investors who take advantage of the “Dow Discount” this summer could benefit in a big way.
Let me explain. When investors think about value stocks, they’re thinking about names that are trading “cheap” compared to their fundamentals. Since the Dow is trading 84% higher than the March 2009 market lows, it’s not surprising that most investors think that value opportunities have long since dried up in the blue-chip stocks. But that’s a big mistake.
You see, there are two sides to that value equation: price and fundamentals. While prices have rallied (and rightly so), corporate fundamentals have made massive strides in the last two years.
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Right now, the Dow sports a P/E of 13.35 -- meaning that Dow stocks are trading for a smaller chunk of earnings than they have any other time this year. And the index’s P/E estimates, the future numbers that the market’s pricing in, currently sit at 12.36; that means that stocks are being priced cheaper than they were at their lowest point in October 2008.
Corporate balance sheets have also been beefed at the same time -- today, the Dow’s price-to-book ratio is in the exact same range it was in the latter half 2008.
Fundamentally, blue-chips are significantly outpacing expectations on Wall Street. Last quarter, the market churned sideways even though more than 70% of S&P 500 stocks reported positive earnings surprise. A full 83% of Dow components beat their earnings estimates during that same quarter.
While the market isn’t the deep value smorgasbord that it was in March 2009, there’s clearly a value mismatch going on between market prices and corporate fundamentals. Investors have been risk-hungry leading up to June’s slide, bidding up more speculative names, and leaving money on the table in blue chips. Now’s the time to collect with these five Dow discount names.
Telecom giant AT&T (T) is one of the most deeply entrenched of the major telcos, providing phone service to 45 million landline users and Internet connections to another 16 million broadband customers. But the real cash cow is AT&T’s wholly owned AT&T Mobility unit, which provides cellular service to 86 million phone customers in the U.S., making it the second-largest carrier in the country and giving AT&T a bigger chunk of domestic cellular subscribers than any other single company.
One of the biggest catalysts for AT&T’s growth was the exclusive contract on Apple’s (AAPL) iPhone from the device’s launch in 2007 through February 2011. The phone was transformational for AT&T, contributing to approximately a quarter of its customers and shifting its margins to the higher end of the spectrum through data costs.
While AT&T lost its iPhone exclusivity this year, customer attrition doesn’t appear to be the concern that Wall Street had priced in. Instead, the biggest risk to share prices surround the proposed $39 billion T-Mobile acquisition, which is still subject to regulatory approval.
Even with the acquisition risks factored in, AT&T looks cheap today. The company’s earnings sell for a fraction of the multiple seen at peers. And a 5.53% dividend yield is extra incentive to take on shares right now.
Shares of technology blue-chip Hewlett-Packard (HPQ), one of TheStreet Ratings' top-rated computer hardware stocks, may have gotten hit hard in 2011 (the stock’s price has slid 16% this year), but that’s making HP’s value proposition stand out all the more. HP has long been a major player in the computer business, but management has wisely opted to limit its exposure to the highly commoditized revenue stream in the last couple of years, instead opting to beef up its higher-margin enterprise IT operations. That’s a wise move in this market.
While consumer products are likely to remain the lynchpin of HP’s business, adding competitive IT solutions to its income statement adds some in-demand diversification to the company’s operations. The switch to offer more services hasn’t been cheap for HP, but the payoff is likely to far outpace any investments the company has already made as long as management can keep their focus resolute.
In the meantime, impressive recurring revenues and a massive free cash flow stream should continue to drive interest in shares.
My cursory valuation puts a price tag closer to $46 on shares of HP right now.
Walt Disney Company
$73 billion entertainment behemoth Walt Disney (DIS), one of TheStreet Ratings' top-rated media stocks, is hardly the same company it was in 1928, when the then 5-year-old old studio introduced Mickey Mouse to the world; today, Disney owns a substantial portfolio of theme parks, film studios, and television networks -- and a nearly unmatched intellectual property vault. Investors who want a piece of that action can get a good deal on shares this month.
That’s because Disney currently trades at more than a 23% discount to peers on an earnings basis alone. One of the biggest drivers of that earnings prowess is its media network business (of which often imitated but still not-yet-replicated ESPN makes up a massive chunk of revenues), which reaches a massive chunk of households and provides ample cross-promotional opportunities that competitors simply can’t touch.
Some of Disney’s units (like theme parks, for instance) have indeed faced substantial headwinds in the face of a soft economy. That said, the company has consistently maintained high levels of profitability in both good times and bad. This “cartoonish” discount to the market isn’t likely to last.
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Don’t compare standard-bearer Intel (INTC) to the rest of the semiconductor industry. This $114 billion tech name is largely immune to the cyclical successes and paper-thin margins that lesser competitors face. Intel has long been the biggest game among chipmakers, but the company has never outshined its competition the way it does today. Part of that outperformance comes from the R&D cash that management has been able to plow back into the company, another comes from the preferential marketing the firm has managed to score with its OEM customers.
As a result, Intel currently claims 80% of the microprocessor industry, generating more than $43 billion in annual sales and a dividend payout of 3.9%. That’s a mammoth yield for a tech firm, earning it a spot on a recent list of 5 Best Dow Stocks With Big Dividends.
With Intel’s core market nearly saturated, the company will need to find new growth avenues if it wants to keep impressing investors -- they’ll likely come from the ballooning mobile device market, one area where Intel has thus far fallen short. Even so, the relative valuation on Intel is shockingly low right now when the company’s unmatched market positioning and hefty cash payout are factored in.
Home Depot’s (HD) exposure to the housing market made it a name that investors were eager to avoid in 2008 -- but that same exposure is making this home improvement retailer an attractive Dow stock this summer. With continued languishing in the housing market, cost-conscious consumers have turned to do-it-yourself projects to upgrade and maintain their homes in the last few years, keeping Home Depot’s sales flowing steadily all the while.
That’s not to say that the company didn’t get hit at all by the housing crash. Home Depot did overextend itself in the housing boom years, building out its geographic footprint to include locations that didn’t make economic sense under more bearish economic assumptions. That said, all of Home Depot’s recessionary fallout has abated at this point, and restructured operations look strong.
The company sports mid-single-digit margins at present, an enviable measure of profitability in the retail sector. Even so, the company is significantly cheaper than the rest of its industry right now on both an income statement and balance sheet basis. That bargain price has fuelled some rising analyst expectations on Wall Street, but the stock still trades well shy of where it should be right now.
According to Frank Byrt, Home Depot is one of 10 Funds' Best Stocks to Beat a Market Slump.
To see all of these Dow value stocks in action, check out The Dow Discount portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.