3 Stocks for 2014: The Cheapest of the Dow

3 Stocks for 2014: The Cheapest of the Dow

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Happy holidays! Stocks hit record highs today as the most valuable U.S. company, Apple, gained 3.8% on the announcement that it has finally inked a deal with China Mobile. TheS&P 500 and the narrower Dow Jones Industrial Average both rose 0.5%. With the major indexes at all-time highs (the Russell 2000 index of small-capitalization stocks is, too), many observers are warning that stocks are beginning to look expensive, but that's not the case for all Dow components. Three of the four cheapest, ranked by ascending order of forward price-to-earnings multiples are IBM , Chevron and Cisco Systems .

(In case you're wondering, the absolute cheapest is JPMorgan Chase, but I've decided not to profile it here because it has already received so much attention this year.)

Shares of IBM tracked the S&P 500 through the first quarter, but they then ran out of steam even as the index continued to rally. The gap between the two widened this quarter in the wake of a disappointing third-quarter earnings report from IBM, which included its sixth straight quarterly decline in revenue.

Valued at just 10.2 times the next 12 months' earnings-per-share estimate, the stock -- which is the worst performer in the Dow this year, with a 6% loss -- could now represent an opportunity for patient investors. At today's closing price of $182.83, the stock price is not much above Bloomberg's $171 estimate of Berkshire Hathaway's per-share cost basis on its 68.1 million-share position. Berkshire Hathaway began accumulating shares in early 2011 and continued buying them through the first half of this year. And if you're looking for perspective on last quarter's earnings, this is what Warren Buffett told Charlie Rose at the end of October: "They will have record per-share earnings this year. That can be disappointing if you expected more. But it is not a bad record, believe me."

With a 13.5% year-to-date rise, shares of Chevron are not the worst performers in the Dow, but they did lag the broad market by a pretty good margin. Still, that's the case of every oil and gas "supermajor" this year, as investors raised concerns regarding Big Oil's ability to boost production and reserves -- and the level of investment required to achieve this.

At 10.3 times the next 12 months' earnings-per-estimate, Chevron shares are cheaper, on that measure, than those of the other Dow supermajor, ExxonMobil , at 12.6 times. I would remind investors that Buffett added 40.1 million shares of the latter to Berkshire Hathaway's portfolio this year -- the largest new position since he bought IBM. As I see it, both stocks look attractive today, if you're ready to invest over an equity-appropriate minimum holding period of three to five years.

Investors weren't impressed with Cisco Systems' last two quarterly earnings reports, and the stock, which was outperforming the S&P 500 on a year-to-date basis through nearly the entire third quarter, is now close to 20 percentage points behind the index. During the last earnings report, in particular, analysts and investors were aghast by the low guidance the company provided for the current quarter (try a year-on-year revenue decline of between 8% and 10% on for size!). As an explanation, CEO John Chambers pointed the finger at depressed demand for Cisco's products across emerging markets.

Nevertheless, at just 10.8 times the next 12 months' earnings per share, the stock's valuation appears to offer some protection against the risk of a near-term slowdown in demand. Intelligent investors will to ask themselves: Five years from now, will global demand for Cisco's products be higher than it is today or lower? If the answer is yes, how we get there is a secondary issue -- some volatility in demand is to be expected.

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The article 3 Stocks for 2014: The Cheapest of the Dow originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Apple, Berkshire Hathaway, Chevron, and Cisco Systems and owns shares of Apple, Berkshire Hathaway, China Mobile, and IBM. 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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