Despite the Dow Jones Industrial Average's long climb to 14,000, Gene Marcial from Business Week reports that there are nine companies among the Dow whose shares are trading at a discount to their estimated worth. Among these blue chips that could be attractive to bargain hunters are companies like Johnson & Johnson, Wal-Mart, and Proctor & Gamble, according to Pat Dorsey, director of research at Morningstar.
Dorsey estimates that JNJ, for example is trading at a 22% discount to its fair value estimate. He says that JNJ hasn't been this cheap in 15 years. It's trading at just 15 times S&P's 2007 EPS estimate. The stock is trading around $61, but Dorsey thinks the stock is worth around $80. In a recent post, I suggested that JNJ could easily be selling for $70 to $75 based on historic valuations.
Proctor & Gamble is another bellweather trading at a discount. S&P's Loran Braverman has a $77 price target on the shares, that are currently trading for around $61. Dorsey also believes that P&G (NYSE:PG) is worth $77.
Some other discounted names include Home Depot (NYSE:HD), American Express (NYSE:AXP), 3M (NYSE:MMM) and Citigroup (NYSE:C). Georges Yares says that Citigroup is a strong player among the big banks because of its geographic diversity. He estimates the the company -- now trading close to $51 -- to be worth $65 with a dividend just north of 4%.
Warren Buffett suggests determining the value of a company, and then buy its shares at a fair or bargain price to your estimate. He suggests a discounted price, because your estimate of the price for the shares could be wrong. Giving yourself a margin for error allows your estimate to be a little off, while still being able to make a profit on your purchase.
Disclosure: I own shares in Johnson & Johnson.