Wall Street has fallen back in love with rapidly growing tech companies with huge cash hoards and/or tremendous leverage to the artificial intelligence (AI) trend. Meanwhile, it’s turning a cold shoulder to the blue-chip Dow Jones Industrial Average. In fact, the index is down slightly on the year compared with a 25% gain for the Nasdaq. While some of the 30 components should be avoided, there are a handful of undervalued Dow Jones stocks investors should scoop up before they once again catch Wall Street’s attention.
The best undervalued Dow stocks are supported by strong trends that are likely to continue for many years. Furthermore, the investor pessimism related to fears about the economy and interest rates that has contributed to the Dow’s underperformance appears to be overdone. There are signs the Federal Reserve may pause its interest rate hike campaign this month, and central bankers are forecasting U.S. gross domestic product (GDP) will increase by an annualized rate of 2%, excluding inflation, this quarter.
Buy these Dow stocks before Wall Street does.
| CAT | Caterpillar | $209.02 |
| CSCO | Cisco | $49.74 |
| MRK | Merck | $110.96 |
Caterpillar (CAT)
Construction equipment maker Caterpillar (NYSE:CAT) is down 14% year to date and trading with a forward price-to-earnings (P/E) ratio of 12.4, which is 25% below its five-year average. This is despite some major trends working in the company’s favor.
First, the U.S. government is spending heavily on infrastructure with more to come thanks to the U.S. Bipartisan Infrastructure Law. Also noteworthy for Caterpillar is the increase in spending on construction, which hit a seasonally adjusted annual rate of $1.9 trillion in April, up 7.2% year over year and well ahead of estimates. Finally, since Caterpillar also sells agricultural equipment, the company should benefit from the rising demand for food to meet the needs of a growing population.
While fears about slowing demand for the company’s products in China hit the stock, China has proven adept at stimulating its economy when it hits rough patches. And while I expect Caterpillar’s oil and gas business to struggle amid lower fossil prices, I predict its mining equipment business will flourish over the longer term as sales of electric vehicles continue to soar.
With some major tailwinds at its back, CAT is one of the top Dow stocks with growth potential for long-term investors.
Cisco (CSCO)
Cisco (NASDAQ:CSCO) is up nearly 5% in 2023, yet it is underperforming the broader market and has a forward P/E of 12.3, which is 16% below its five-year average.
Cisco’s core business is providing the infrastructure that enables the internet and data centers to function. The stock’s lackluster performance is somewhat surprising given the company is poised to benefit from the Internet of Things phenomenon and the increased utilization of online video. Moreover, Cisco is utilizing AI to enhance the attractiveness of both its WebEx videoconferencing business and its IT security unit.
On May 17, Cisco announced “beat-and-raise” third-quarter results. Revenue climbed an impressive 13.5% year over year and came in $210 million above analysts’ average estimate. Earnings per share, excluding certain items, of $1, exceeded the consensus outlook by 3 cents. Furthermore, management now expects the company’s top line to jump 14% to 16% during the current quarter versus the same period a year earlier, while their EPS forecast of $1.05 to $1.07 was also ahead of estimates for $1.04.
Making CSCO stock even more attractive and cementing its status as one of the best undervalued Dow stocks, shares throw off a significant dividend yield of 3.1%.
Merck (MRK)
Rounding out this list of the best undervalued Dow stocks is drugmaker Merck (NYSE:MRK), whose shares are roughly flat in 2023. The stock’s forward P/E of 15.9 is more than 13% above its five-year average. Yet, the stock still looks like a bargain given that, as I pointed out in a previous article, Merck’s Keytruda “is one of, if not the most, successful cancer drugs of all time.”
The treatment generated $20.9 billion in sales for Merck last year. And the drugmaker is working to get Keytruda approved as a treatment for other types of cancers. While Keytruda’s patent will expire in 2028, Merck is taking steps, including working on “two subcutaneous versions of Keytruda,” that will likely wind up extending the drug’s patent protection.
Bank of America recently upgraded MRK, citing the strong earnings power of Keytruda and the company’s HPV vaccine, Gardasil. Moreover, the bank is upbeat about Merck’s pipeline.
And, in late April, Citigroup analysts expressed optimism about the company’s takeover of Prometheus Biosciences (NASDAQ:RXDX). According to the bank, Prometheus’ most-promising drug, which is used to treat ulcerative colitis, Crohn’s disease and other autoimmune conditions, could lift Merck’s bottom line by 15% to 30% over the long term. Citi has a “buy” rating on MRK stock.
A 2.6% dividend yield is just icing on the cake for this undervalued Dow stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
