Investing

7 Greatly Undervalued Dow Stocks for Upside and Dividends in 2020

Jon C. Ogg

Published: December 17, 2019 7:15 am

Last Updated: January 30, 2020 12:06 pm

It has been undeniable that stocks have enjoyed more than an impressive recovery and continued rally to all-time highs in 2019. The Dow Jones industrial average was up about 21% on a total return basis so far in 2019, and that great gain is even less impressive than almost a 27% gain for the S&P 500 and more than 34% gain for the tech-heavy Nasdaq-100 Index. What is now more important than looking backward is looking ahead. That brings 2020 into prime focus.

Investors have a lot to consider as 2020 gets closer. There is an impeachment process, an announced but unsigned phase-one trade deal with China, and an upcoming election that is likely to be quite nasty. There may even be some new tax changes coming in 2020 as well. 24/7 Wall St. has already tracked the forecasts from top firms calling for 3,300 to 3,400 on the S&P 500 in 2020. That would imply another 6% gain or so, without considering dividends on individual stocks.

One thing that is changing ahead is that many investors now believe it’s time to go back to individual picks rather than solely betting on the rising tide of the indexes to lift all ships. Some strategists see value finally winning the day, while other strategists want to be more aggressive. Chasing the stock market for 6% gains after a 200% rally since the change of the last decade might be too much risk for some investors. After all, a rapid change in government policies or an unexpected geopolitical event could do far more damage to the indexes now that they have risen so much.

24/7 Wall St. has identified seven of the 30 Dow stocks to which value investors and others may flock. These are either cheap on a relative valuation basis or they may be cheap against prior highs or against their Refinitiv consensus analyst target prices. We have identified why each name may be too cheap to ignore, but any seasoned investor knows that 1) cheap stocks are cheap for a good reason and 2) that there is no reason they cannot get even cheaper.

Some investors choose to go to the Dogs of the Dow for dividends and value, but this strategy has frequently not performed well. Other investors like to look solely at price-to-earnings (P/E) ratios or other traditional metrics. And some investors just cannot help themselves by looking for Dow stocks that are down handily from their former highs. There is opportunity and risk in any of these strategies, and no investor should buy a stock solely because an analyst, seasoned investor or even a drinking buddy says it’s too cheap to ignore.

If history holds true, some of the down and out Dow stocks are likely to recover. Unfortunately, history also dictates that some of the losers of the Dow are likely to keep disappointing investors and holding back the index’s gains. We have provided some candid criticism on each company, as well as what the implied returns would be, dividend yields and other metrics. Here are seven Dow stocks that are viewed as undervalued for 2020.

Cisco Systems

Cisco Systems Inc. (NASDAQ: CSCO) has been one of the largest leaders in the technology space for years. It has made endless acquisitions and has bought back so much stock over time that some wonder how it hadn’t just taken itself private. Still, Cisco is a slow grower that has a business now more in line with GDP growth than growth of the internet and technology. It also has migrated away from just a sales-stringent environment to more of a recurring revenue model that now includes security and other services more than ever. Cisco has been volatile around earnings, and it has been all but shut out of new business in China, despite having made up with Huawei in years past.

At $46.00 a share, Cisco is down from a 52-week high of $58.26, and its consensus target price is $52.16. That would imply a 13% gain to the analyst’s target, and its shares would have to rise about 27% to hit a new 52-week high. Total return investors can also look at Cisco’s 3.05% dividend yield to add to whatever upside expectations they are looking for.

Dow Inc. (NYSE: DOW) remains a big question mark in the Dow, now that the DuPont merger and ongoing breakup have begun. The new entity just entered into a pact to offload its nutrition and bioscience unit. Since the merge and starting its breaking up, Wall Street has just not had a real idea of how to value Dow. Is Wall Street aggressive enough or did it overshoot, valuing it at 15 times 2019 and barely 13 times 2020 consensus earnings estimates?

With shares trading at $54.00 on last look, the stock would have to rise more than 10% to hit its 52-week high of $60.52. It’s also almost 4% under its consensus target price. And there is that 5.2% dividend yield to consider.

Exxon Mobil

This one has been included here as it is often considered cheaper than rival Chevron. While Exxon Mobil Corp. (NYSE: XOM) may not be making major mistakes on its own, the investing community has been collectively shunning oil and gas investments, and that “ESG investing theme” trend is expected to continue and to keep growing in importance. This is America’s largest oil company by market value, but the almost $300 billion market cap is way down from its glory days and is now only about 15% of Saudi Aramco. It is also valued at close to 21 times a mix of expected 2019 and 2020 earnings, with roughly a 5% dividend yield.

Exxon investors have grown accustomed to thinking the stock is cheap. That happens around major changes, and even though it’s up a paltry 1% in 2019, there is no reason to see a major change in valuations unless there is some major underlying change in its sector or how the company operates. Its consensus target price of $78.36 implies upside of almost 12% from its current $70 share price, but its 52-week range of $64.65 to $83.40 shows how challenged it has been. It does not even matter to most investors anymore than this was valued at $100 per share back in 2014.

Home Depot

Home Depot Inc. (NYSE: HD) is cheap on two metrics. First is that at $216.00 a share it is down from a 52-week high of $239.31, now that it has not continued with its impressive trend on beating earnings. The second reason it is cheap is that the consensus target price is up at $233.35. That would translate to a gain of 8% to hit the consensus target, or almost 11% to reach its prior high again. The 2.5% dividend yield also has to be considered.

Home Depot seems to have finally given an opening for rival Lowe’s to recover some lost ground and to make for its prior underperformance. There is the risk of a slowdown in housing and the consumer could falter in 2020. One area where the stock may not seem all that cheap against the broader market is its valuation of more than 21 times current-year earnings expectations.

IBM

This is a company that just can’t seem to get it right. International Business Machines Corp. (NYSE: IBM) has stagnated during a great economy, so one can only imagine how bad things would be in a bad economy. It is valued at barely 10 times expected earnings, and the company could see its stock surge if it would just announce a CEO transition. It has not even been rewarded by shareholders for making its largest-ever acquisition of RedHat. Then again, its legacy IT-consulting business has the same decline that has been seen in cigarette sales over time, and its newer growth initiatives just cannot grow fast enough to evade an overall image of stagnation.

At $134.25, IBM shares are down from a 52-week high of $152.95. That’s actually down from well over $200 way back in 2012 and 2013 — as if they didn’t get the raging bull market memo or something. The consensus target price would imply a gain of about 10.5%, and total return investors have that 4.7% dividend yield to consider.

The king of fast food has stopped surging in its growth and recovery plan, and it recently lost its star CEO due to a relationship with a subordinate that was against company rules. McDonald’s Corp. (NYSE: MCD) shares are still about double the level of five years ago, so looking for a snapback resumption of growth may be a hard pill to swallow. McDonald’s also likely will have to be at least a tad more conservative with its shareholder returns, after having bought back so much stock and having grown its dividend so much. Being valued at 23 times next year’s earnings may seem high for a restaurant stock, but we are talking about the most valuable restaurant chain in the world here.

What makes McDonald’s screen as “cheap or undervalued” is that the current $197.50 share price is down from a high of $221.93 and that the consensus price target is still up at $222.53. Maybe analysts need to get a tad more conservative in their upside projections here, but the expected upside is over 12% to those higher numbers, and that’s before considering its 2.5% dividend yield.

Travelers

Many investors may not even remember that Travelers Companies Inc. (NYSE: TRV) is a Dow stock. Insurance and other financial services might not be the most exciting area to many investors, but it has shown somewhat stable returns, and less than 13 times next year’s earnings shouldn’t panic anyone.

Trading at $136.00, Travelers is down handily from its yearly high of $155.09 per share. While that would require a 14% rally to get back to its high, the consensus target price has become more conservative and was last seen closer to $141.00. Travelers also comes with a 2.4% dividend yield.

Some investors are likely to point out that some other Dow stocks would be considered cheap as well. That may be true, but we kept it to one in each group or sector to keep the list focused.

These Dow stocks are not alone in being down from their highs.

Boeing Co. (NYSE: BA) is down over 26% from its high of $446.01. Its woes are tied to the 737 Max disasters and subsequent grounding, and until any clarity is seen there, it’s unlikely to trade based on normal ups-and-downs of the Dow or the S&P 500.

3M Co. (NYSE: MMM) is down 23% from its 52-week high and is almost one-third lower from its former $250 high. It now has environmental issues, and investors have yet to get much comfort and clarity about its declining margins and decline in earnings.

The decline in Walgreens Boots Alliance Inc. (NASDAQ: WBA) also had been brutal, but would-be takeover hopes and bottom fishing by investors have taken it back above the consensus target price.

One nasty lesson that investors have learned about Dow stocks is that they do not come with a permanent designation to the index. Companies like General Electric, Hewlett-Packard, AT&T, Alcoa, General Motors, Citigroup, Altria, AIG, Honeywell, Kraft and others have been booted out of the Dow over the past 15 years.