The Dow Stock the Market Has Overreacted To


The macro view: Is this a turning point for stocks as investors reassess the outlook for future earnings? The DowJones Industrial Average (INDEX: ^DJI) fell 1.8% -- the worst daily performance since June 21 -- while the broader S&P 500 (INDEX: ^GSPC) declined 1.4%.

In the second half of this year, there have only been four days with a greater than 1% decline in the S&P 500, two of which have occurred in the past three days. If you've been reading this column assiduously, you'll know that I think volatility has been exaggeratedly muted over the past few months, so I think this is just part of a return to normality. And speaking of volatility, the VIX (INDEX: ^VIX) rose 13% to close a little shy of 19, but that still puts it below its average since its inception in 1990.

The micro view: Only two stocks in the Dow gained ground today (both technology shares: Microsoft and Intel). The three worst performers were: DuPont (NYS: DD) (down 9.1%), 3M (NYS: MMM) (4.1%) and Alcoa (3.5%). The former two missed expectations in reporting their third-quarter results before today's market open. Has the market overreacted to these reports? At first glance, my inclination is to answer "quite possibly."

If we take DuPont, for example, the shares are now yielding 3.5%. That dividend looks safe, too: At 52%, the payout ratio over the past 12 months is in line with the median 48% ratio over the past 20 years. In 2008, when net income dropped by roughly one-third, DuPont maintained its dividend. Further, at 11.2 times the estimate for the next 12 months' earnings per share, the shares hardly look overpriced, even if you expect (as I do) that estimate to come in somewhat over time.

Does that mean the shares have bottomed? There is no way to know that --“ it's very conceivable they could go lower yet. However, if we reason in terms of probabilities and long-term returns, this cursory analysis suggests that the odds of a favorable outcome are pretty good. If you're a long-term investor, you'll also want to consider "The 3 Dow Stocks Dividend Investors Need." Click here to receive your free report now.

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Alex Dumortier, CFA, has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel, 3M, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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