If You're Looking for Value, the Dow's Not the Place to Be

Don't bother with the 30 stocks that make up the Dow Jones Industrial Average. After reviewing the financials of each of the Dow stocks a few weeks ago, I'm convinced it's the last place that investors who are trolling for bargains will find compelling value.

This doesn't mean the Dow average will be going down anytime soon, just that it will have difficulty making upside progress with so many stretched valuations. Investors focused on Dow stocks are already missing some hearty action in the average stock, which has been in a distinct uptrend since December, while the Dow is down.

It's a Story of Excess

The purpose of a "correction" is to correct excess. And Wall Street played the big-caps, notably the Dow, to excess in the most recent cycle, which lasted from 1995-2000. Expect a reversion to the mean that could last a few years, as the excess of that cycle gets unwound and corrected.

Just look at my Top-10 column for examples of outperformance of smaller companies in the current, new cycle. Three of my Top 10 are retailers: J.C. Penney(JCP Quote), Circuit City(CC Quote) and Office Depot(ODP Quote). The market value of each was less than $5 billion when I recommended them in December -- compare that with retail behemoth and Dow component Wal-Mart(WMT Quote), which is worth about $230 billion. ...