Ranking The Dow Jones Components: Stocks On The Bottom

by: Benjamin Goldman

Over the last couple of months, I have been experimenting with a ranking algorithm designed to predict fluctuations in stock price. To read about the ranking algorithm itself, see 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 at the bottom of the rankings. Since the DJIA contains only blue chip stocks, I would not place a sell recommendation on all of these stocks, but I do expect many of them to underperform. To read about the top DJIA stocks, see the first article in this series, the second, and the third.

19. E.I. du Pont de Nemours & Company (DD)

DuPont is ranked nineteenth because there is nothing special about its stock that should signal investors to buy. DuPont has paid the same 41 cent dividend since the fourth quarter of 2007, and there are much better options in the DJIA for dividend growth. DuPont's EPS is expected to increase to $4.55 per share in 2012, so at $47.12, DuPont may be an OK stock to hold to see if its dividends can improve.

20. General Electric (NYSE:GE)

Since Jack Welch’s departure in 2001, GE shares have cut in half and continue to decline. GE paid a 31 cent dividend in 2008 and the first quarter of 2009, and then had to drop its dividend to 10 cents. Although General Electric continues to innovate as a company, its financials have simply disappointed. If GE is to reach its target of $21.75, it will require either a great earnings report or an extremely bullish market.

21. Exxon Mobil Corporation (NYSE:XOM)

The oil industry is a difficult one to invest in, as volatile oil prices and the future prospects of gasoline both sway stock prices. Exxon Mobil has a fairly low dividend yield of 2.52 percent when compared to ConocoPhillips (NYSE:COP) at 4 percent and Royal Dutch Shell (RDS) at 5.18 percent. The Dow Jones industrial index consists of several good stocks, and Exxon Mobil’s share performance simply does not stack up to other Dow components.

22. Pfizer, Inc. (NYSE:PFE)

Pfizer is considered to be a good buy from analysts. Of the 21 analyst recommendations on Yahoo Finance, 9 recommend strong buy, 9 recommend buy, and 3 recommend hold. However, Pfizer’s performance has been flat as of late, and its bearish tendencies don’t look like they will reverse any time soon. Pfizer shares have dropped 35.27 percent in the last 5 years as the market dropped by 7.87 percent. There is a strong chance that Pfizer shares may continue to underperform, and there are much better DJIA stocks to invest in.

23 (tie). The Walt Disney Company (NYSE:DIS)

The Walt Disney Company has a very strong brand and a good business model, but there are no signs that its stock will significantly grow anytime soon. The entertainment industry is a very mature market, but dividend yields are typically low across the industry. Disney shares offer very little for shareholders.

23 (tie). The Travelers Companies (NYSE:TRV)

Travelers is ranked in a tie for 23rd because of its bearish tendencies. Earnings per share is expected to decrease in 2011 to $3.96 from its 2010 EPS of $6.26. The stock trades at a low P/E ratio of 9.9, and shares do not look like they will bounce back in the near future, as its share price target was cut to $47.00 on September 14.

23 (tie). Wal-Mart Stores (NYSE:WMT)

Wal-Mart manages to post consistent increases in earnings despite its paper-thin margins. Wal-Mart is the true definition of a low-cost leader, and although its supply chain management is extraordinary, it is not operating in a very attractive industry. Other industries in the DJIA seem far more bullish right now.

26. Hewlett-Packard Company (NYSE:HPQ)

HP is currently facing an identity crisis, and investors do not like its current predicament. Increased component prices, an unsuccessful tablet, and a desire to grow in the competitive technology services industry all make investors very bearish on HP. Please read my recent article to see all its potential fates.

27. JPMorgan Chase & Company (NYSE:JPM)

JPMorgan in my opinion is one of the better banks from a business standpoint. What makes the ranking algorithm rank its shares so low stems mainly from lofty analyst expectations and a low intrinsic growth rate. The value of JPMorgan stock implies investors do not believe it has much potential to improve. JPMorgan Chase shares have dropped 5 percent in the past month as competitors Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) have all increased in price over this time. Investors may continue to stay bearish on JPMorgan as its competitors’ stocks begin to recover.

28. Intel Corporation (NASDAQ:INTC)

Intel is a “lost decade” stock that trades at a very low P/E ratio. Intel looks similar from a trading standpoint to Microsoft, but Intel shares are ranked lower because Intel has a much less optimistic outlook for investors compared to Microsoft (NASDAQ:MSFT). Microsoft has a short ratio of only 1.2, compared to Intel’s 2.3 short ratio. Although Intel’s 3.82 percent dividend yield looks very attractive in the technology sector, this high yield stems mainly from Intel not having cash cows and not much else to invest in.

29. Alcoa Inc. (NYSE:AA)

Alcoa trades at a low $11.97 compared to its adjusted price of over $40 in 2008. Alcoa’s dividend yield is very low at 1 percent, and its future outlook looks bleak across the board. Alcoa has somewhat high expectations to recover in earnings and stock price, but if Alcoa fails to meet these expectations, shares can remain bearish.

30. Chevron Corporation (NYSE:CVX)

As mentioned earlier, the ranking algorithm believes that the oil industry is very bearish and not a good industry to invest in. Chevron has outperformed the market over the past year, but its high short ratio of 2.3, the potential for oil prices to decrease, and its low expected earnings growth all suggest that Chevron is about to substantially decrease in price. The combination of several negative indicators is what drove my ranking algorithm to put Chevron stock at the bottom of the Dow Jones industrial average index.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.