The 10 Worst Dow Stocks to Buy?

Earlier, I wrote about The Dow's 10 biggest bargain stocks -- those names that, based on their P/Es, estimated earnings growth, and dividend yields, have the highest implied returns among members of the Dow Jones (INDEX: ^DJI) .

But what about the others? What about the stocks with the lowest implied returns? Well, here they are:






29Pfizer (NYS: PFE) 4.2%2%19.1
28Merck (NYS: MRK) 4.4%2%19.1
27Johnson & Johnson3.5%4%18.6
26Kraft (NYS: KFT) 3.1%6%20.7
23Procter & Gamble3.2%6%19.1
21McDonald's (NYS: MCD) 2.8%6%19.0

Sources: S&P Capital IQ, author's calculations.
*Excludes Bank of America, which didn't generate trailing earnings.

What jumps out most about this list is the valuations. Almost of these names trade at valuations above the Dow's median P/E of 16, even though their adjusted earnings-growth estimates tend to only meet or trail the median adjusted estimated growth rate of 6%.

That's not to say that this list will necessarily underperform the Dow -- after all, analysts can make mistakes. (That's why I adjusted all 30 of the growth estimates downward by the historical analyst margin of error -- 40%.) But it bears worth looking into.

Pharma giants Pfizer and Merck may carry huge dividend yields but have anemic estimated earnings growth. What worries analysts is their pipeline cliff. With big names like Pfizer's Lipitor and Xalatan off-patent, there's a $15 billion revenue hole that needs to be made up. Completely independently, fellow Fool Sean Williams recently made a convincing case for Pfizer as his pick for the Dow's worst stock. Meanwhile, Merck has made some strides in its pipeline-replacement attempts. While its top asthma drug, Singulair, could see generic competition as early as this August, it's applying for FDA approval of eight new drugs over the next two years. Still, that doesn't guarantee approval or commercial success -- Merck's hepatitis C drug Victrelis hasn't fared too well.

Kraft is another name that could make sense on this list. As I noted yesterday, Kraft trades at a valuation that reflects preferences among "defensive" investors. Should the economy continue turning around, we could see that change as higher-growth names become more popular.

I'm somewhat less skeptical of names like Coke and McDonald's. Yes, the Golden Arches' valuation may seem a bit high, but compared with some of the other names on this list, like retailer Kraft, there should be no contest. Analysts are predicting similar growth rates (around 9%) for these two companies, yet Kraft produced only 4% annual growth over the past five years, while McDonald's grew at a 16% rate and still has lucrative growth opportunities in emerging markets like China, which has helped to fuel its growth in the past.

Don't just look at where a stock or company has done in the past. And don't rely exclusively on analyst growth estimates, but dig deeper into the threats -- and golden opportunities -- belonging to your companies. If you'd like some help, take a look at one stock that our chief investment officer picked to crush the market in our brand-new report, "The Motley Fool's Top Stock for 2012." It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company for free

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned. The Motley Fool owns shares of Johnson & Johnson and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola, Procter & Gamble, Pfizer, McDonald's, Johnson & Johnson, and Chevron and creating a diagonal call position in Johnson & Johnson. 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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