As an investor, I am always looking for an edge. I devour financial news voraciously, sorting hype from the real nuggets of information. I have found that reading financial stories often triggers an idea for this weekly column.
Last week I came across an article that discussed growth stocks that were undervalued according to Wall Street. The article merely looked at consensus analyst targets for companies that were 40% to 70% undervalued based on these consensus targets.
I decided to apply this kind of analysis to the 30 companies that make up the Dow Jones Industrial Average. The Dow is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. These are large, well-established companies, the bluest of the “blue chips.” The total market capitalization of the companies that make up the Dow is $10.3 trillion.
I dumped the 30 Dow components, which you can find here, into one of my spreadsheets I use for analyzing companies. One of the cells in that spreadsheet contains the consensus analyst target prices from the data provider FactSet. I then compared that value to the most recent closing price to come up with the “upside”, which is simply the percentage gain that would be required to reach that estimate.
Using that metric, here are the 10 most undervalued companies in the Dow according to these consensus estimates.
And using the same analysis, here are the 10 most overvalued Dow components. Home Depot (NYSE: HD), at the top of this list, is currently 3.5% above the consensus target of analysts.
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, which 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.
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