All investors love a good bargain where you can buy a stock for much cheaper than it's worth.
Bargain-shopping quality companies helps you avoid two of the costliest mistakes investors can make: overpaying for a strong performer and buying shares of a weak business that's not worth owning in the first place.
To help you identify some potential opportunities for your portfolio, I built a screen to pick out the 10 biggest bargains in the Dow (INDEX: ^DJI) . I compiled all 30 Dow stocks and ranked them by order of their implied five-year stock returns from today, based on their dividend yields, projected earnings growth rates, and price-to-earnings multiples.
Below are the names of the 10 biggest bargain stocks in the Dow:
Projected Earnings Growth
Caterpillar (NYS: CAT)
JPMorgan Chase (NYS: JPM)
Intel (NAS: INTC)
Microsoft (NAS: MSFT)
Now, while the numbers tell us that these are the 10 biggest bargains in the Dow, that doesn't guarantee they'll necessarily be the best performers. We all know how analyst predictions can be flawed, or how investors may not immediately reward strong earnings performance with a well-deserved multiple.
So let's take a closer look at a few of them.
Stock No. 1: Caterpillar
On a price-to-earnings basis, Caterpillar is one of the most expensive of the 10 stocks on our list. But it ranks highly because of its predicted earnings growth. It's important to remember that construction equipment is a cyclical industry recovering from a global economic downturn. That's what accounts for analysts' optimism. For the Caterpillar thesis to play out, it's critical that U.S. and global economic growth will hold strong.
Stock No. 2: JPMorgan Chase
Like its too-big-to-fail brethren Bank of America and Citigroup, JPMorgan Chase is cheap. And why wouldn't it be? The dangers facing the industry are many: a financial crisis in Europe, legal liabilities from their handling of the housing bubble and foreclosure bust, and financial reforms that will reduce fees and trading revenue -- all at a time of slow loan growth.
Still, the economy, which added a strong 243,000 jobs last month, is especially important for economically sensitive industries like banking. If the economy continues to recover and banks secure a favorable mortgage settlement against the public, banks like JPMorgan could be outperformers.
Stock No. 3: Intel
With three-quarters of Intel's revenue coming from PC chips and the increasing adoption of mobile devices over PCs in the developed world, investors wonder whether Intel has what it takes to break into a market dominated by the technology of British chip designer ARM Holdings, which is designing processors that could compete in Intel's server territory.
Still, in the most recent quarter, Intel's sales grew an enormous 21%. Investors seem to be overlooking the fact that PC sales in emerging markets continue to grow rapidly.
And don't overlook Intel's advantages of scale. The chip giant dominates the PC market, spending more on R&D than ARM and AMD, its chief PC competitor, produce in combinedsales.
Stock No. 4: Microsoft
The market is acting as though Microsoft is a relic of the past. Over the past five years, shares haven't gone anywhere. Yet the tech giant continued to grow; over that same timeframe, earnings per share nearly doubled.
The most dramatic growth is coming from its server and developer tools and business segments, as well as its burgeoning Xbox division, whose pre-tax profits doubled over the past year to cross the $1 billion threshold. But some two-thirds of the growth in Microsoft's earnings per share has come from its reduced share count. The stock is cheap, and management is using its enormous cash flow to buy back discounted shares.
That continues to be the story. In its most recent quarter, Microsoft announced that sales grew another 5%, while earnings per share grew slightly on strength in its commercial business.
The raw numbers tell us that these 10 stocks have a good chance of outperforming the Dow, but our chief investment officer selected a different stock as the No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Get access to the report and find out the name of this promising company.
At the time thisarticle was published Ilan Moscovitzowns shares of Disney but no other company mentioned. The Motley Fool owns shares of Microsoft, Bank of America, Citigroup, JPMorgan Chase, Intel, and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola, Microsoft, Walt Disney, and Intel, creating a write covered strangle position in American Express, and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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