It is becoming clear that 2024 is a very different year than the last year. Although we’re still in the middle of a bull market, it is more of a broad-based rally, higher this time than it was in 2023.
Back then, the so-called Magnificent Seven stocks accounted for virtually all of the market’s gains. This year, although most of those companies are still performing well — and some like Nvidia (NASDAQ:NVDA) continue to do very well — the seven tech giants are not having the same impact.
Well, on the S&P 500 they are, because it is a market capitalization-weighted index. Six of the Magnificent Seven are worth $1 trillion or more (only laggard Tesla (NASDAQ:TSLA) is not). That means their movements affect the index more than they do a price-weighted index like the Dow Jones Industrial Average.
It is also why the S&P 500 is up 17% year-to-date and the Dow is up a measly 4%. Yet this offers investors an opportunity. It suggests undervalued Dow stocks may be more prevalent than those on the popular benchmark index.
So let’s dive into the three companies below that may be some of the best undervalued Dow stocks to buy today.
Goldman Sachs (GS)
Goldman Sachs (NYSE:GS) is an investment bank in transition. Weighed down by acquisitions in wealth management and installment lending that it thought would diversify its operations, today the financial giant is reorganizing its efforts to concentrate on investment banking, trading, and investment management. It will continue divesting consumer-facing businesses.
Goldman took big writedowns on its home improvement lender GreenSky, which it sold last October. It also scrapped its co-branded credit cards with General Motors (NYSE:GM) while Apple (NASDAQ:AAPL) terminated its Goldman Sachs card.
The turnaround effort is working. First-quarter profit exceeded analyst expectations as the investment banking division benefited from increases in underwriting and dealmaking. Last year was a mixed one for mergers and acquisitions. While dealmaking hit a decade low, some of the biggest acquisitions ever took place, including Exxon Mobil’s (NYSE:XOM) purchase of Pioneer Natural Resources. Goldman Sachs was the lead advisor on the $60 billion transaction.
The investment banker’s stock is up 50% over the past year and Wall Street expects earnings to grow 22% annually for the next five years. Trading at just a fraction to those projected growth rates, Goldman Sachs stock is one of the leading undervalued Dow stocks to buy today.
3M (MMM)
Industrial conglomerate 3M (NYSE:MMM) has destroyed value for investors for years. Over the past decade, the owner of Post-It Notes and Scotch-brand tape has a total return of just 23% compared to a 190% return by the Dow.
Its malaise culminated in May of this year when this former Dividend King slashed its dividend by more than half. Facing mounting lawsuits over faulty products (made by a company it acquired) and environmental pollution allegations, 3M was forced to conserve cash. But it also spun off its consumer products business Solventum (NYSE:SOLV) to return some value to shareholders and began settling the lawsuits against it.
Today, 3M is a much healthier company financially and the markets approve. Shares are up 9% in 2024 which turned the conglomerate into an undervalued Dow stock worth buying. 3M goes for 12 times earnings estimates and a deeply discounted 11x free cash flow (FCF). With a lower dividend payment, 3M can now support the payout. MMM stock deserves renewed consideration by investors.
Dow (DOW)
This is fun to write: chemical stock Dow (NYSE:DOW) is an undervalued Dow stock. Shares trade at 12 times earnings estimates, a fraction of sales and 14x FCF. Dow stock, though, is down 5% this year and off 2% for the last 12 months. Shares remain 27% below the all-time high they hit in 2021.
The tide is turning for the chemicals company. Demand recovered in the first quarter even though sales were down 9% year-over-year. However, they were up 1% sequentially. Chairman and CEO Jim Fitterling told investors, “We captured improving demand, maintained pricing, and benefited from lower feedstock and energy costs.” As a result, volumes grew and margins expanded.
Because chemicals are a commodity and their price tends to move in tandem with Brent crude oil prices, Dow should benefit from Brent prices north of $84 a barrel. That is 5% above the price one year ago. The Energy Information Administration forecasts oil to trade around $89 a barrel in the back half of 2024. It does not expect that to change much next year as it forecasts Brent crude at $88 a barrel.
The higher prices should help Dow improve its capacity utilization. And with lower natural gas prices in the mix now and going forward, the chemicals stock should also benefit as it lowers its feedstock costs. That points to improving profitability and should have investors putting DOW stock on their buy list.
On the date of publication, Rich Duprey held a LONG position in MMM, SOLV and XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
