Dow Components' 5-Year Forward P/Es

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 |  Includes: AA, CAT, CSCO, HPQ, INTC, MSFT
by: Insider Monkey

The best performing stocks in the market are usually the fastest growing stocks or the stocks with the highest expected growth rates. In this article, we are going to focus on the 30 Dow Jones Industrial Average index stocks. We will discuss their expected growth rates over the next five years and calculate their 2016 P/E ratios based on their estimated growth rates. The data is sourced from Finviz. In theory, stocks with high growth estimates and low current P/E ratios should outperform the market on the average. Below is a list of the 30 constitutes of Dow Jones Industrial Average Index. We ranked them by their P/E ratios for 2016.

Company

Ticker

P/E ratio for 2016

EPS growth next 5 years

Alcoa, Inc.

AA

4.63

22.36%

JPMorgan Chase & Co.

JPM

5.01

8.30%

Hewlett-Packard Company

HPQ

5.04

5.63%

Caterpillar Inc.

CAT

5.09

23.03%

Bank of America Corporation

BAC

5.42

9.75%

Chevron Corporation

CVX

6.31

6.86%

Microsoft Corporation

MSFT

6.60

10.48%

Walt Disney Co.

DIS

7.07

13.65%

Cisco Systems, Inc.

CSCO

7.21

9.39%

Intel Corporation

INTC

7.40

10.60%

General Electric Company

GE

7.49

13.33%

Exxon Mobil Corporation

XOM

7.66

8.14%

The Travelers Companies, Inc.

TRV

7.75

8.33%

E. I. du Pont de Nemours and Company

DD

8.01

9.70%

American Express Company

AXP

8.03

10.56%

Pfizer Inc.

PFE

8.45

2.93%

International Business Machines Corp.

IBM

8.46

10.71%

Merck & Co. Inc.

MRK

8.49

4.71%

Wal-Mart Stores Inc.

WMT

8.60

9.64%

United Technologies Corp.

UTX

8.84

11.67%

3M Co.

MMM

8.89

11.22%

The Home Depot, Inc.

HD

9.72

13.70%

Johnson & Johnson

JNJ

9.82

6.21%

Boeing Co.

BA

9.86

11.53%

Verizon Communications Inc.

VZ

10.26

10.59%

Procter & Gamble Co.

PG

10.41

8.68%

AT&T, Inc.

T

10.62

4.05%

Kraft Foods Inc.

KFT

10.65

9.56%

McDonald's Corp.

MCD

11.90

10.54%

The Coca-Cola Company

KO

12.79

6.63%

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According to the estimates, Alcoa Inc is the best Dow stock for the next five years because its P/E ratio for 2016 is the lowest among the 30 Dow constitutes. AA is estimated to grow at 22.36% annually over the next five years and its P/E ratio for 2016 is only 4.63. The aluminum company reported third quarter net income of $172 million in 2011, up from $61 million for the same quarter a year earlier. AA has a market cap of $11B. As of September 30th, 2011, there are 25 hedge funds with AA positions. John Paulson is the most bullish hedge fund manager about AA. At the end of September, Paulson & Co had $281 million in AA.

Caterpillar Inc is also one of the best Dow stocks for the next 5 years. It is expected to grow at 23.03% per year and it has a low P/E ratio for 2016 of 5.09. Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It reported net income of $1.1 billion for the third quarter of 2011, up from only $792 million for the same period in 2010. CAT has a market cap of $68B. At the end of the third quarter, there are 33 hedge funds reported to own CAT in their 13F portfolios. For example, Ken Fisher's Fisher Asset Management had $320 million invested in CAT at the end of September last year. The stock was up 44.49% so far since then, versus 16.99% for SPY in the same period.

Though some stocks do not have very high expected EPS growth rates, their P/E ratios for 2016 are still low compared with those with double-digit expected growth rates. For example, Hewlett-Packard Company is expected to grow by 5.63% per year in the next few years, but its P/E ratio for 2016 is also very low: 5.04. The technology company reported net income of $7.1 billion for the 12 months ending October 31, 2011, compared with $8.8 billion for the 12 months ending October 31, 2010.

Though analysts are not so bullish about HPQ, hedge funds do not agree with them. Forty-three hedge funds reported owning HPQ in their 13F portfolios at the end of September. Seth Klarman's Baupost Group initiated a brand new $466 million of HPQ over the third quarter. John Paulson's Paulson & Co also invested $341 million in this stock. Other mega-cap tech stocks are also great value plays. Microsoft, Intel, and Cisco are among the ten stocks with the lowest forward P/E ratios.

There are some investors who strictly invest in mega-cap blue chip stocks. Most hedge funds also have at least one or more Dow stocks in their portfolios. We encourage investors to purchase some Dow stocks with attractive multiples and growth rates. We believe that by focusing on these best Dow stocks, investors will be more likely to outperform the market in the next five years.

Disclosure: I am long T, MSFT.