It’s been a good year for the Dow Jones Industrial Average. The index has gained over 12% so far in 2019, reversing a 5.6% decline seen last year. 25 of the 30 Dow Jones stocks have risen so far this year.
That admittedly makes it a bit tougher to find value in the index’s components. But there are still a few Dow Jones stocks to buy left. Valuations for several components are reasonable — and maybe too reasonable. And given that nearly all of the Dow Jones stocks promise ownership of quality businesses with long-term track records of creating value, there are still good stocks to buy.
UnitedHealth Group (UNH)
UnitedHealth Group (NYSE:UNH) has been one of the Dow’s losers this year, dropping about 1.5% YTD. That comes after UNH was one of the index’s best stocks, rising from a little over $100 at the beginning of 2015 to $287 late last year.
In the context of those gains, the recent pause makes some sense. Stock chart aside, there are some risks here. A Democratic win in the 2020 U.S. presidential election could augur more government intervention into healthcare — and at the very least create some uncertainty for the stock. An increasing focus on drug rebates could pressure profits at the company’s Optum unit, a key source of growth. Investors sold off UNH after a first quarter that was solid, but not quite up to the high bar UnitedHealth has set with recent performance.
Still, I recommended UNH stock back in February, at a higher price — and this still looks like an attractive long-term play. Valuation is reasonable, at less than 17x 2019 EPS estimates. Optum still is growing. UnitedHealth’s market lead seems secure. Even more government involvement in healthcare seems likely to strengthen UnitedHealth’s position rather than weaken it. Indeed, UNH stock did quite well in the wake of the passage of the Affordable Care Act.
UNH almost certainly isn’t going to come close to tripling over the next four-plus years, but there’s still reason to see 10%+ total returns annually, at least.
Shares of energy giant Chevron (NYSE:CVX) fell back in April when the company announced a plan to buy out shale play Anadarko Petroleum (NYSE:APC). And CVX stock now trades at pretty much the same price it did after the decline.
But, of course, Chevron isn’t buying Anadarko. It dropped out after Occidental Petroleum (NYSE:OXY) made a higher offer for Anadarko. Chevron not only dumped a deal investors didn’t like, but it received a cool $1 billion termination fee in the process.
And yet CVX stock trades where it did after the deal was announced. Lower crude prices might be a factor, but Chevron’s integrated model limits its exposure to oil prices (which is either good or bad news, depending on crude’s trend).
That alone suggests that CVX should be able to re-test recent highs around $126. And while that’s only ~4% upside, admittedly, there’s a nearly 4% dividend yield as well. Dividend aside, Chevron stock remains cheap, at less than 14x 2020 EPS estimates. And there might be another, better-liked, acquisition out there for Chevron to make.
CVX stock probably isn’t going to be a huge gainer over the next six months — or even the next few years. But there’s a nice combination here of value, income and a company with options to improve shareholder returns going forward, no matter where oil prices go.
Exxon Mobil (XOM)
Chevron’s fellow energy component, Exxon Mobil (NYSE:XOM), looks attractive here as well. XOM stock trades at a similar valuation on an earnings basis, but its 4.7% dividend yield is higher than that of CVX. For the world’s largest energy company — and like Chevron, one with impressive upstream/downstream diversification — that type of yield is rare, and attractive.
That said, there are some concerns. Most notably, XOM stock has been a terrible investment for basically this entire decade. The stock has risen 10%, total since the beginning of 2010. Investors have received healthy dividends, but Exxon stock still has badly underperformed the broader markets. More recent performance has been even worse: XOM stock touched its lowest levels in almost eight years back in December. And it’s fallen over 25% from 2014 highs; even with dividends, shareholders are in the red over that period.
That said, XOM stock is about as cheap as it ever gets. Its dividend yield hasn’t been this high in over 20 years. Meanwhile, even amid weak trading the past few years, investors who have tried to time the bottom — and sell at the top — generally have been able to take some profits. Longer-term investors can get in cheap.
It’s not a perfect bull case, and as I wrote just a few months ago, XOM stock is not the play for those betting on higher oil prices. Those who are looking for stocks to buy for income and value, however, should look closely at both XOM and CVX.
There are a number of stocks like Visa (NYSE:V) in the current market. The argument isn’t over the health of the business, but rather the price investors are willing to pay. On a forward basis, Visa stock is second-most expensive of the Dow Jones stocks, just modestly behind Nike (NYSE:NKE).
But as I wrote this week, Visa stock still seems worth paying up for. The staggering returns of the last decade — nearly 1,000% including dividends — aren’t going to be replicated over the next ten years. But Visa still is growing earnings at a double-digit clip, with B2B (business-to-business), international, and domestic opportunities for more gains ahead. Visa stock isn’t cheap, but a “set it and forget it” long-term play rarely is.
Goldman Sachs (GS)
On the other side of the Dow’s valuation spectrum is Goldman Sachs (NYSE:GS). Goldman Sachs stock is the cheapest in the Dow in terms of earnings, with its 7.4x forward multiple barely a quarter that of Visa and Nike.
And there are reasons why GS stock is cheap. Trading revenue has been uneven. The company’s investment banking business is losing share to Morgan Stanley (NYSE:MS). Investors on the whole aren’t giving much credit to financials, with more traditional banks too trading at cheap multiples.
That said, GS stock is not just cheap, but close to ridiculously so. Indeed, the stock trades below its tangible book value — the net value of its assets. That implies essentially zero value for the company’s franchise, which remains a Wall Street leader. (To be fair, investors simply could believe that the net value of the assets is going to come down if and when the economy turns.)
Meanwhile, Goldman Sachs continues to invest in newer efforts. CEO David Solomon has noted that its Marcus online banking effort has received “absolutely no credit” from investors. The same is true of the new credit card venture with Apple (NASDAQ:AAPL). There are worries here with a market near all-time highs and an economy heading into year eleven of expansion. But Goldman Sachs stock seems to be pricing in much of the risk — and little of the upside.
JPMorgan Chase (JPM)
Shares of JPMorgan Chase (NYSE:JPM) hardly look expensive, either. JPM trades at 10.3x 2020 consensus earnings per share estimates. Like GS, the low multiple comes in part due to worries about the economic cycle, but JPM still receives a nearly three-turn premium to its rival on an earnings basis.
Of course, there’s a strong case that JPM deserves that premium. I still think this is the premier big bank stock to own, along with Bank of America (NYSE:BAC). And after the last 2-3 quarters, JPMorgan Chase probably has pulled ahead of BofA.
There’s simply a lot to like here. The combination of retail and investment banking is a plus. Growth continues to be solid: Q1 numbers crushed expectations as the company posted double-digit EPS growth. The company’s delinquency rate, meanwhile, continues to decline and remains among the best in the industry.
Again, near- to mid-term economic risks are a factor. Lower interest rates could pressure earnings in 2020. But I see this as a stock to buy and owned for decades, not just years, and the price at the moment remains attractive.
This week, I called out Dow (NYSE:DOW) as one of the DJIA’s 5 worst stocks so far this year, but as I wrote, that was a bit of stretch. DOW stock actually has risen 2.7% in its few weeks on the public markets, but in terms of the broader story, it’s been a disappointment.
That broader story was the breakup of the former DowDuPont into DOW, Corteva (NYSE:CTVA), and DuPont (NYSE:DD). Many savvy value investors saw the three-way split driving significant value, with many estimates topping $80 of value per DowDuPont share. The figure, at the moment, is under $50.
There have been external pressures, to be sure. Adjusted earnings declined sharply in the first quarter. Trade battles between the U.S. and China aren’t helping. Neither are concerns about the global automotive industry. Cyclical worries are a factor here, too: other chemical stocks like LyondellBasell Industries (NYSE:LYB) and Westlake Chemical (NYSE:WLK) are similarly cheap as investors discount potentially falling earnings.
That said, there’s a case to try and time the bottom here. DOW offers an attractive 5.5% dividend yield. It’s still a leader in many of its end markets. Global demand may be choppy, but it should rise over time.
This might be the most aggressive play in the index right now. DOW stock can take a beating if economic sentiment worsens. But personally, I’m not yet convinced that the smart money backing the DowDuPont split was necessarily wrong.
As of this writing, Vince Martin has no positions in any securities mentioned.