8 Best Value Stocks In Dow 30 Stocks

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Includes: CAT, CVX, DD, IBM, INTC, UTX, WMT, XOM
by: Tushar Chande

Summary

Value can be hard to pin down and even harder to find.

We show a simple tool that can be used to find weakness in stocks.

Adding in price earnings ratio and dividend yield helps narrow the search for value.

Introduction

We identify eight stocks in the Dow Jones Industrials index that deserve at least a quick look from so-called value investors. Value it seems is in the eye of the beholder, but the unifying principle is to buy a good company at a good price. We will use traditional tools such as price-earnings ratio and dividend yield, but introduce a simple calculation to find cheap stocks. We will use the Dow Jones Industrial average of 30 stocks as our universe, because they already meet other value analysis criteria for liquidity and business survivability.

A traders' description of value investing is buying weakness and holding the position without a trailing stop. So, value investing is a counter-trend buy strategy. So, we need a simple rule to identify weakness.

Identifying Weakness

We use a 250-day simple moving average of prices, representing approximately one-year of trading, and normalize the distance of the latest close below the average by dividing that distance by the 250-day standard deviation of daily prices. This calculations produces a negative number, and the smaller the number, the lower the prices are below the 250-day simple moving average. Applying this approach to the Dow Jones data produces the results in Figure 1 below.

Dow 30 stocks with worst deviation

Figure 1: Dow 30 stocks ranked by deviation only. Dupont was furthest below its 250-day moving average when that distance was expressed as a multiple of its 250-day standard deviation of daily closing prices. (Data courtesy ETFmeter.com)

Adding Dividend Yield and P/E Ratio

We use Google Finance [1] to fill in the dividend yield and price earnings ratio data, shown in Figure 2. The data for the entire Dow Jones Average is for a P/E ratio of 16.66 and dividend yield of 2.45%. Value investors often use these two calculations to filter their data.

Weakest Dow stocks with fundamental data

Figure 2: We add in Price-Earnings (P/E) ratio data and dividend yield to connect the technicals to the fundamentals as we proceed further with our analysis. (Data courtesy ETFmeter.com)

Value Constraints

A good value investor would demand that the chosen stock pay a greater dividend than the index as a whole, and be cheaper than the index, i.e., carry a lower P/E ratio. Hence, we can screen the data in Figure 2 to remove stocks with P/E ratio greater than 16.66 and a dividend yield less than 2.45%. The results are shown in Figure 3 below.

Dow Short List after fundamental data

Figure 3: Dow 30 industrials stocks showing price weakness with lower P/E ratio (< 16.66) and higher dividend yield (> 2.45%) than the index as a whole. This table can be used as a starting point for further analysis. (Data courtesy ETFmeter.com)

Summary

A small investor can choose an index and apply simple price analysis to find weak stocks, and then add in data on P/E ratio and dividends to develop a short list for further analysis.

References

[1] google.com/finance

[2] http://online.wsj.com/mdc/public/page/2_3021-peyield.html

[3] Tushar Chande, "Best Value Stocks in the Dow Jones Industrials (DJIA)," http://www.etfmeter.com/blog.aspx?id=4412

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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