Two Of The Most Attractive Discounted Stocks In The DowJanuary 28 | Posted by Kevin Monaghan | Top Story
I recently looked through the DOW components to start my search of where I wanted to invest my recent sales of 2010 holdings Kraft (KFT) and Altria (MO). It’s not a rule of thumb to limit my search to the DOW, I usually like to start there to get a sense of what industries might be trading at a slight discount based on P/E ratios. My initial thoughts were that my search would lead me to life, drug, banks, and old tech companies.
I had guessed Microsoft (MSFT) or Intel (INTC), which has had stagnant stock prices over the last decade despite double digit revenue and dividend growth, could be one of the companies with the lowest P/E ratios. Intel does trade at a low multiple to earnings, but it wasn’t the lowest. I also thought Pfizer (PFE), J&J (JNJ), or Merck (MRK) would be on the low end since expiring patents, tough approval processes, and a lack of new products coming to the market have kept these companies from participating in the recent rally.
The two companies that had the lowest were Travelers (TRV) and AT&T (T), each with a P/E ratio lower than 8. Both are stocks I already had a small position in. Travelers just reported earnings, and its stock has been moving higher as I’m writing this article. Perhaps its P/E ratio will be a above 8 soon. AT&T also just reported earnings, and they seemed to be light on new subscribers, so shares may become even cheaper.
I’m probably going to add to my position in AT&T (T) to replace the 6% dividend of Altria. The company has great cash flow, it’s yielding 6%, it consistently increases its dividend, telecom is somewhat of a recession proof play for me, and in my opinion it won’t lose too many customers to Verizon (VZ) just because they have Apple (AAPL) products now too. I don’t mind holding AT&T (T) in my portfolio, and given the low P/E ratio I’m happy to pick some up at this level.
As for Travelers (TRV), I wouldn’t mind adding to this position, but I’m not going to at this time. I began a position in my portfolio in late September as the hurricane season was dying down and we escaped with no real damage. A light hurricane season was hardly my main reason for investing in this company. Again, they have good cash flow, good payout ratio, strong business model, and the stock is trading with a low P/E ratio because the interest rate environment is not favorable and top line growth is expected to be stunted for some time due to the recession. I intend to keep my current Travelers (TRV) position the same and keep the some of my cash on the sidelines for now. I’m hoping the next few weeks bring lower stock prices after the run up of the last four months.
For the purpose of this article, I used P/E ratio to define “cheapest.” When investing in a company with a low P/E ratio it’s important to remember that there is a reason investors have sold off the stock and put pressure on its earnings multiple. It may take time for the company or economic reasons to shift favor a higher P/E ratio again, and hopefully it does come back.
Disclosure: Author, Kevin D. Monaghan, Senior Account Executive at Elite Investment Group is long T, TRV, KFT, APPL