These 3 Dow Stocks Can Bring You Surprising Value

The Dow Jones Industrial Average recently exceeded the previous record of 14,164 reached in October 2007. Of course, a number of components in theindex returned to their peak much sooner and are now handily above levels seen in 2007. The beststocks of the Dow since then include:

  • The Home Depot (NYSE: HD ) , up 108%
  • IBM (NYSE: IBM ) , up 75%
  • McDonald's Corp. (NYSE: MCD ) , up 67%
  • Wal-Mart Stores Inc. (NYSE: WMT ) , up 63%
  • The Walt Disney Co. (NYSE: DIS ) , up 59%
  • Travelers Cos. Inc. (NYSE: TRV ) , up 53%

If the Dow was only composed of outperforming stocks such as these, then we would have already surpassed 20,000. Of course, the index also has its share of dead weight. In fact, 12 of the Dow's 30 companies remain underwater when compared with that 2007 peak (prior to the inclusion ofdividend payments). It's not a pretty list:

On the face of it, these stocks have little in common. Alcoa Inc. (NYSE: AA ) , for example, is an extremely well-run company that is suffering from a global slump in aluminum prices. The company is arguably much healthier than it was in 2007, thanks to a series of streamlining moves, so it could be poised for greatgains once the aluminummarket strengthens.

But stocks such as Bank of America Corp. (NYSE: BAC ) , Hewlett-Packard Co. (NYSE: HPQ ) and Merck & Co. Inc. (NYSE: MRK ) deserve the beat-down they've gotten. These companies failed to adapt to changing times and instead lurched into new businesses that simply weighed them down.

But is it unfair to characterize Merck as a loser when all of Big Pharma has suffered frompatent expirations? Well, Pfizer Inc. (NYSE: PFE ) and Johnson & Johnson (NYSE: JNJ ) , both Dow components, have seenshares rise by double digits since that late 2007 peak. These companies are nicely diversified and don't completely depend on blockbuster drugs for their sales and profits. Still, it's useful to look at this group of losers to see which are capable of regaining lost luster. Of the 12laggards listed on the table above, three of them stand out as solid values.

1. Cisco Systems Inc. (Nasdaq: CSCO )

I recently spelled out why I see Cisco as a rejuvenated company, noting that its significant cash-flow generation provides ample downside support in case the market swoons anew. As forupside , a number of Cisco's end-markets have been constrained, but should look healthier in coming years, which could help thisstock shed its ultra-low valuation metrics.

2. The Boeing Co. (NYSE: BA )

I also remain a big fan of the world's largest airplane maker, even after huge setbacks for its new Dreamliner plane, and a new era of smaller defense spending.

As I wrote in October 2012 , Boeing generates very strongcash flow , which should help to support higher dividends and share buybacks. Since I looked at Boeing five months ago, shares are up 23%, and would likely have done even better were it not for the Dreamliner's exploding battery problems.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CSCO in one or more if its "real money" portfolios.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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