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Sydnee Gatewood
Sydnee Gatewood
Articles (3160) 

4 Dow Jones Stocks to Consider as Indexes Continue to Rise

These stocks are modestly undervalued based on the GF Value Line

With investors hopeful about a potential new stimulus bill, market indexes were up for a third straight day on Friday morning. The Dow Jones Industrial Average gained 210 points, or 0.7%, while the S&P 500 was up 0.9% and the Nasdaq Composite rose 1.1%.

As a result of these developments, investors may be interested in taking advantage of opportunities found among companies that are part of the 30-stock index.

Using the GuruFocus Fair Value Line, a new unique method of estimating the intrinsic value of a stock, investors can find potential value opportunities. Based on the popular Peter Lynch value line, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line takes more than price into account when determining value. It also considers a company's historical price-earnings, price-book, price-sales and price-to-free cash flow ratios, an adjustment factor based on past returns and growth as well as future estimates of the business' performance.

Using the GF Value Line for Boeing Co. (NYSE:BA) as an example, we can see that the stock is considered to be a potential value trap. The share price is represented by the blue line, while the solid black line shows the past intrinsic values calculated by the GF Value Line. The dotted portion of the black line illustrates the estimates of future intrinsic value. The red and green bands delineate overvaluation and undervaluation, respectively, with the darker shades indicating more severe deviations from the intrinsic valuation.

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As of Oct. 8, the GuruFocus All-in-One Screener, a Premium feature, found Dow Jones companies that were modestly undervalued, had a price-to-GF value between 0.4 and 0.9 and a predictability rank of at least two out of five stars were Cisco Systems Inc. (NASDAQ:CSCO), Intel Corp. (NASDAQ:INTC), 3M Co. (NYSE:MMM) and The Travelers Companies Inc. (NYSE:TRV).

Cisco Systems

Cisco has a $168.96 billion market cap; its shares were trading around $39.91 on Friday with a price-earnings ratio of 15.18, a price-book ratio of 4.47 and a price-sales ratio of 3.44.

Based on a GF Value of $49.08 and a price-to-GF Value ratio of 0.82, the San Jose, California-based company, which manufactures and sells networking hardware, software, telecom equipment and other high-tech services and products, appears to be modestly undervalued.

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The GuruFocus valuation rank of 4 out of 10, however, leans more toward overvaluation even though the price-earnings and price-book ratios are near multiyear lows.

GuruFocus rated Cisco's financial strength 7 out of 10, driven by comfortable interest coverage. The Altman Z-Score of 2.99, however, suggests it is under some pressure. Regardless, the return on invested capital eclipses the weighted average cost of capital, suggesting it is generating good returns on its projects.

The company's profitability fared even better, scoring a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 9, which indicates business conditions are healthy. As a result of slowing revenue per share growth over the past year, however, the five-star predictability rank is on watch. According to GuruFocus, companies with this rank typically return an average of 12.1% annually over a 10-year period.

Of the gurus invested in Cisco, Dodge & Cox is the largest guru shareholder with a 0.65% stake. Ken Fisher (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), the Tweedy Browne (Trades, Portfolio) Global Value Fund, Yacktman Asset Management (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio), the Yacktman Fund (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies also have large positions in the stock.

Intel

Intel has a market cap of $226.94 billion; its shares were trading around $53.22 on Friday with a price-earnings ratio of 9.82, a price-book ratio of 2.77 and a price-sales ratio of 2.94.

With a GF Value of $61.72 and a price-to-GF Value ratio of 0.86, the tech company, which is headquartered in Santa Clara, California, appears to be modestly undervalued.

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The GuruFocus valuation rank of 7 out of 10 supports this assessment.

Although assets are building up at a faster rate than revenue is growing, Intel's financial strength scored a 7 out of 10 rating on the back of comfortable interest coverage and a robust Altman Z-Score of 3.75. The ROIC also surpasses the WACC, suggesting good profits from its investments.

The company's profitability scored a 9 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 7. Due to consistent earnings and revenue growth, Intel also has a four-star predictability rank. GuruFocus says companies with this rank typically return an average of 9.8% annually.

With 0.67% of outstanding shares, Fisher is Intel's largest guru shareholder. Other top guru investors include PRIMECAP, Chris Davis (Trades, Portfolio), Pioneer, Simons' firm and Michael Price (Trades, Portfolio).

3M

3M has a $97.55 billion market cap; its shares were trading around $169.66 on Friday with a price-earnings ratio of 19.2, a price-book ratio of 8.99 and a price-sales ratio of 3.13.

Trading with a GF Value of $196.11 and a price-to-GF Value ratio of 0.86, the St. Paul, Minnesota-based industrial conglomerate, which manufactures everything from Scotch tape and Post-it Notes to power tools, appears to be modestly undervalued.

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The GuruFocus valuation rank of 5 out of 10, however, leans more toward overvaluation since the share price and price-sales ratio are approaching one-year highs.

GuruFocus rated 3M's financial strength 5 out of 10. Although the company has issued approximately $7 billion in new long-term debt over the past three years, it is still at a manageable level due to adequate interest coverage. The strong Altman Z-Score of 4.4 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing and revenue per share growth has slowed down over the past year. The ROIC is also above the WACC, indicating good profits on its investments.

Even though the operating margin is in decline, the company's profitability scored an 8 out of 10 rating. 3M is supported by strong returns that outperform a majority of competitors, as well as a moderate Piotroski F-Score of 6, which indicates business conditions are stable, and a four-star predictability rank.

Fisher is 3M's largest guru shareholder with a 0.77% stake. Other top guru investors include First Eagle Investment (Trades, Portfolio), Grantham, Mairs and Power (Trades, Portfolio), Pioneer, Tweedy Browne, Simons' firm, Tom Gayner (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Dodge & Cox and Mario Gabelli (Trades, Portfolio).

Travelers Companies

Travelers Companies has a market cap of $29.41 billion; its shares were trading around $116.85 on Friday with a price-earnings ratio of 16.55, a price-book ratio of 1.09 and a price-sales ratio of 0.95.

Based on a GF Value of $148.04 and a price-to-GF Value ratio of 0.78, the insurance company headquartered in New York appears to be modestly undervalued.

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The GuruFocus valuation rank of 7 out of 10 also points toward undervaluation.

Travelers' financial strength was rated 5 out of 10 by GuruFocus. Although the company has a low cash-debt ratio, it is supported by sufficient interest coverage. The WACC also surpasses the ROIC, which indicates it is having trouble turning a profit on its investments.

The company's profitability fared better with a 7 out of 10 rating on the back of margins and returns that outperform over half of its industry peers as well as steady earnings and revenue growth. Travelers also has a moderate Piotroski F-Score of 6, but the four-star predictability rank is on watch.

Of the gurus invested in Travelers, First Eagle has the largest stake with 1.54% of outstanding shares. Other top guru shareholders include Hotchkis & Wiley, Pioneer, Mairs and Power (Trades, Portfolio), Dodge & Cox, Jeff Auxier (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Greenblatt, Richard Snow (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Ray Dalio (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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