Revisiting the Dow’s Undervalued and Overvalued Stocks
In last week’s article, I talked about a group of stocks I had identified in 2021 as being overvalued or undervalued. To summarize, I had selected the 10 stocks from the Dow Jones Industrial Average that were either undervalued or overvalued according to the consensus analyst target price.
Two and a half years later, the undervalued list is 22.4% higher and the overvalued list is 8.3% lower. Over that same time period, the Dow rose by 7% and the S&P 500 was up 9%.
This week I decided to do that analysis once more.
I dumped the 30 Dow components, which you can find here, into a spreadsheet I use for analyzing companies. One of the cells in that spreadsheet contains the consensus analyst target prices from the data provider FactSet. This is one of several metrics I use for stock-picking.
I compared the target price to the most recent closing price to come up with the “upside”, which was simply the percentage gain that would be required to reach that target. I then listed the 10 most undervalued and overvalued companies in the Dow according to these consensus estimates.
Using that metric, here are the 10 most undervalued companies in the Dow as of 9/8/23 according to these consensus estimates.
These time horizon for these targets is usually 1-3 years. The average upside for this undervalued list is 24.3%.
Using the same analysis, here are the 10 most overvalued Dow components.
Intel (NSDQ: INTC) as the most overvalued Dow component, is interesting. Share are still nearly 30% below where they were at the beginning of last year, but they have made a nice recovery this year, rising 42% since the start of the year. Analysts clearly believe shares have risen into overvalued territory.
Overall, the upside for the overvalued list is only 4.1% on average, and three of the ten are above their target price.
Let me offer the caveat that sometimes analyst estimates are wrong. If they weren’t, investing would be a piece of cake. We could just invest according to consensus targets and outperform the market.
Nevertheless, they do offer some insight into Wall Street’s thinking. Further, these will be the companies that brokers are recommending to clients. This can provide some uplift and some downside resistance. In other words, it’s not the only consideration in picking a stock, but it’s a good piece of information. An undervalued stock, heading into an economic recovery, could be your chance to catch lightning in a bottle.
As I did previously, I will plan to review these picks in a year or two.
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