The Dow Jones Industrial Average has surged by over 20% in the past year amid a broad-based stock market rebound. As such, it’s only natural to wonder whether the constituents within the Dow Jones Industrial Average are overvalued.
The best way to address the central question is to flip it around. In other words, let’s re-base the question: Does the Dow Jones Industrial Average contain undervalued stocks? The answer is yes. The Dow Jones Industrial Average is a price-weighted index, meaning undervalued opportunities will always exist.
Considering the aforementioned, I picked out three undervalued Dow stocks that look set to blossom. Let’s discuss each in detail.
Caterpillar Inc. (CAT)
As the world’s largest construction equipment manufacturer, Caterpillar (NYSE:CAT) needs no introduction. The firm has additional verticals in resource industries, energy and transportation, and financing. Therefore, it’s safe to say that Caterpillar provides a comprehensive experience to its end market.
CAT stock is up by approximately 50% year-over-year. CAT stock’s beta coefficient of 1.15x means it is riskier than the overall stock market, suggesting its year-over-year increase isn’t overplayed. In fact, recent events imply CAT stock is set for additional gains.
Caterpillar released its fourth-quarter earnings results last month, beating its earnings target by 48 cents per share. The firm’s sales edged up by 3% year-over-year to $17.07 billion. However, Caterpillar’s adjusted net profits proliferated by 35% during the same time, providing a central talking point.
I believe lower commodity prices paired with a rebound in U.S. building permits will lead Caterpillar to financial success in 2024, concurrently adding to shareholder value. Moreover, CAT stock’s price-to-earnings ratio of merely 15.9x suggests the stock is theoretically undervalued, and let’s not forget about CAT’s dividend yield of 1.51%.
McDonald’s Corp. (MCD)
Many believe an undervalued stock must possess alluring price multiples. However, such a narrative is untrue. A value investing technique known as high-quality value constitutes higher price multiples and robust fundamentals, leading to absolute value.
I place MCD (NYSE:MCD) stock in the high-quality value category. Why? Because McDonald’s has best-in-class profitability ratios and a significant market share in the fast food industry. To add substance to my claim, key data shows that McDonald’s has a market share of around 43.8%, which is paired with a leveraged free cash flow margin of 25.63%. Furthermore, McDonald’s has an opportunity to extend its reach into emerging markets in the coming decades, allowing for perpetual growth. As such, McDonald’s past and future operating results are nearly unparalleled.
Morgan Stanley (NYSE:MS) recently labeled MCD stock a “high-productivity” investment opportunity. According to Morgan Stanley, McDonald’s is among a group of companies set to benefit from artificial intelligence integration. I concur with Morgan Stanley; AI will allow McDonald’s to refine its targeting while optimizing its supply chain, leading to greater profitability.
As mentioned before, MCD stock doesn’t possess alluring price multiples, proven by its price-to-earnings ratio of 24.65x. However, its robust fundamentals and a forward dividend yield of 2.27% mean MCD stock is a high-quality value opportunity.
The Goldman Sachs Group, Inc. (GS)
Goldman Sachs’s (NYSE:GS) stock has traded in line with the Dow Jones Industrial Average year-over-year, but partitioning looks likely. GS stock is positioned to benefit from lower U.S. bond yields and a pending credit spread pivot. Such a combination would allow Goldman Sachs to tap into more affordable funding costs while recognizing higher spreads on its loan book. In essence, Goldman Sach’s profitability outlook is bright.
Another attraction to Goldman Sachs is its private credit expansion. The bank seeks to build its private credit portfolio up to $300 billion from its current $120 billion. Private credit is immensely lucrative in today’s world as new avenues are being opened in emerging markets.
Furthermore, Goldman is well-placed to build on its recent $3.93 fourth-quarter earnings-per-share target beat. Accretive public equity and bond markets add intermediation opportunities, while investment banking activities could rebound alongside merger and acquisition activity.
Key metrics suggest GS stock is grossly undervalued. For example, the bank has a price-to-book ratio of 1.25x, which is a surplus 50% five-year discount. Additionally, GS stock sports a forward dividend yield of 2.83%, adding a floor to its stock price.
You probably can’t go wrong by investing in GS stock!
On the date of publication, Steve Booyens held long, indirect positions in CAT, GS, and MCD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
