Ranking The Dow Jones Components: Middle Of The Pack

Includes: AXP, CAT, IBM, MMM, MSFT, T
by: Benjamin Goldman

Over the last couple of months, I have been experimenting with a ranking algorithm designed to predict fluctuations in stock price. Read about the ranking algorithm itself in my Instablog post. At the market close on September 16, I executed my ranking algorithm on the Dow Jones industrial average components, and it returned a 1 through 30 ranking along with a potential portfolio for an investor wanting to hold only long positions. In this article, I discuss the stocks the algorithm put in the middle of the pack. These are all good stocks to have in a diversified portfolio, but they are not the biggest money-making opportunities on the market. To read about the highest ranked stocks in the DJIA, see the first article in this series.

13. American Express (NYSE:AXP)

The credit card companies as a whole have been doing very well as of late. MasterCard (NYSE:MA), Visa (NYSE:V), American Express, and Discover (NYSE:DFS) have all strongly outperformed the market over the past three months. American Express has been at the back of the pack in relative performance, increasing by 3.33 percent over the past three months, while MasterCard stock has increased by over 30 percent. American Express is an underperforming stock in a very hot industry.

13. AT&T Inc. (NYSE:T)

AT&T is in a very similar position as Verizon (V) as it has very little room for growth due to anti-trust laws. However, AT&T has a higher dividend yield than Verizon at 5.94 percent and a very low P/E ratio at 8.76. The ranking algorithm puts AT&T at only tied for 13th because it fears that investors are still being bearish towards AT&T stock, since its trading activity and analyst expectations mirror those of stocks that have been severely underperforming as of late.

15. Caterpillar, Inc. (NYSE:CAT)

Caterpillar shares have been disappointing recently, as shares have strongly underperformed in the market over the past six months. Cat is ranked in the middle of the pack because, despite its disappointing performance, its short ratio is tied for fourth lowest in the DJIA, suggesting that the stock will turn bullish. Its earnings per share are expected to be $8.87 in 2012, more than doubling its EPS of $4.15 in 2010. Trading at $85.90, Caterpillar stock either has to increase or trade at a very low earnings multiple.

15. International Business Machines (NYSE:IBM)

IBM would have been ranked as one of the top stocks in the DJIA, but it has the highest short ratio in the Dow at 2.6. This bearish position on IBM puts it at the middle of the pack. I will not share my personal opinions on IBM, because I am employed by the company, but here is an article that discusses IBM’s value.

15. 3M Company (NYSE:MMM)

3M has always been a very innovative company and tends to have strong market shares in any market it enters. In the last three months, 3M shares have dropped 12.25 percent, while the market dropped by only 4.36 percent. Trading at a P/E ratio of 13.7, 3M is fairly valued compared to the current market, and is a solid stock to buy in any portfolio. However, it is not a great value, as there are better buying opportunities on the market.

15. Microsoft Corporation (NASDAQ:MSFT)

Microsoft shares have increased by 7.42 percent in the last month, but its P/E ratio is still only 10. With high projected growth, its cash cows, and its high investments in cloud computing, I believe that Microsoft is an undervalued stock. My ranking algorithm puts Microsoft in the middle of the pack because, although it is undervalued and underperforming, there are no major signs that suggest investors’ opinions of Microsoft will change anytime soon.

Disclosure: I am long IBM.

Additional disclosure: I am employed by IBM, but am not paid by IBM to talk about stocks.