The 30 stocks in the Dow Jones Industrial Average are pillars of the U.S. economy and are typically large, reliable American institutions. Surprisingly, even with the U.S. market near all-time highs, Goldman Sachs (GS), JPMorgan Chase (JPM) and International Business Machines (IBM) all still offer buyers excellent bargains.
Goldman Sachs (GS)
Most U.S. business sectors have been firing on all cylinders in recent years, but the financial sector is not one of them. Incredibly, more than seven years after the worst of the Financial Crisis, GS and JPM’s stocks still trade below their respective book value per share.
Big banks’ net interest margins (NIMs) have been hit hard by the double-whammy of stringent post-crisis regulation and lingering historically-low interest rates. After the Fed finally issued its first modest interest rate hike of the new cycle, fears surrounding a possible political push to break up the big banks have kept share prices depressed. Most recently, the Fed chose to delay its next rate hike in the face of global economic uncertainty.
On March 3, UBS senior analyst Brennan Hawken told CNBC that the market is being overly negative on the banks. Said Hawken:
“To me, we’ve priced in a great deal of bad news. Fundamentally, when you look through the loan books, it looks like if we see deterioration, it’s really not going to be that bad.”
All of this negativity has GS shares now trading at a forward P/E of only 8.4, the low end of its historical range and the lowest of all the 30 stocks in the Dow.
JPMorgan Chase (JPM)
Many of the same arguments for the value of GS also apply to JPM. Not only do analysts like Hawken like JPM stock at current levels, JPM CEO Jamie Dimon does as well. In February, Dimon bought half a million shares of JPM stock for around $53 per share. This type of aggressive insider buying is always a good sign of the confidence that the company has in its business.
In addition to JPM’s single-digit trailing (9.8) and forward (9.3) P/Es, the stock also pays a solid 3% dividend.
International Business Machines (IBM)
Finally, the third best value in the Dow today is the transformed IBM. IBM is one of the few large-cap tech hardware companies that have successfully transitioned into the services business. Sure, IBM’s profits have suffered during the transition, and the company’s EPS was down 10% in 2015. However, the company’s cloud analytics, mobile, social, and security segments grew 26% last year and now account for 35% of IBM’s total revenue. This growth shows that IBM’s revenue mix is headed in the right direction and gives investors plenty of reason for optimism in the future.
Morgan Stanley believes that IBM’s Watson will also provide a small but rapidly-growing revenue stream in the future. The firm expects that Watson will double its number of added customers in 2016, and estimates that the annual market for radiological images is $3 billion in the U.S. alone.
Despite all the positive signs for the future and a generous 3.5% dividend, IBM’s stock still trades at a forward P/E of only 10.5, making it one of the three best deals in the Dow.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
