Dogs of the Dow: Pfizer, Chevron Beckon

The Dow is approaching 11,000 but has trailed other U.S. indices in 2010. Here's a breakdown of the Dow stocks and the two best bets for the second quarter.

Author:: Jake Lynch
Publish date:: Apr 9, 2010 5:00 AM EDT

BOSTON (TheStreet) -- The Dow Jones Industrial Average of the 30 largest U.S. companies has gained 4.3% this year, trailing the S&P 500, Nasdaq and Russell 2000 as investors seek out riskier investments while the economy pulls out of a recession.

As a result, Dow stocks are better values. As thousands of companies release first-quarter earnings over the next six weeks, now is the time to examine Dow components' performance and determine which offer the best prospects for the second quarter.

What follows are the best- and worst-performing Dow stocks, and the "dogs" that make for the most compelling bargains.

Top Five Dow Performers of 2010

1. Boeing

(BA) - Get Report

has appreciated 32%. The aerospace and defense contractor is scheduled to report first-quarter results April 21. Boeing trades at a PEG ratio, a measure of value relative to expected growth, of 0.4. A ratio below 1 signals a bargain.

2. Bank of America

(BAC) - Get Report

has gained 24%. The financial supermarket will release first-quarter numbers April 15. It sells for a price-to-projected-earnings ratio of 9.1 and a price-to-cash-flow ratio of 1.2, 64% and 63% discounts to industry averages.

3. General Electric

(GE) - Get Report

has jumped 21%. The conglomerate will announce its first-quarter performance April 15. GE trades at a price-to-projected-earnings ratio of 15 and a price-to-book ratio of 1.7, 18% and 24% discounts to peer averages.

4. DuPont

(DD) - Get Report

has rallied 15%. The diversified chemical maker is scheduled to report first-quarter results April 27. Its stock sells for a price-to-sales ratio of 1.3 and a price-to-cash-flow ratio of 7.4, 51% and 65% discounts to industry averages.

5. Home Depot

(HD) - Get Report

has advanced 13%. The home-improvement retailer will release fiscal first-quarter numbers May 17. It trades at a price-to-projected-earnings ratio of 15 and a price-to-book ratio of 2.8, 19% and 9% discounts to peer averages.

Bottom Five Dow Performers of 2010

1. Verizon

(VZ) - Get Report

has fallen 9.4%. The telecom company is scheduled to report first-quarter results April 22. Verizon sells for a price-to-sales ratio of 0.8 and a price-to-cash-flow ratio of 2.7, 33% and 29% discounts to industry averages.

2. Alcoa

(AA) - Get Report

has dropped 8.8%. The aluminum specialist will release first-quarter numbers April 12. Alcoa shares trade at a price-to-book ratio 1.2 and a price-to-cash-flow ratio of 11, 72% and 55% discounts to industry averages.

3. AT&T

(T) - Get Report

has decreased 7.4%. The telecom company will announce first-quarter results April 20. AT&T sells for a price-to-projected-earnings ratio of 11 and a price-to-book ratio of 1.5, 12% and 30% discounts to peer averages.

4. Pfizer

(PFE) - Get Report

has tumbled 5.8%. The pharmaceutical giant is scheduled to report first-quarter results May 3. Pfizer sells for a price-to-projected-earnings ratio of 7.4 and a price-to-book ratio of 1.5, 41% and 66% discounts to peer averages.

5. Coca-Cola

(KO) - Get Report

has decreased 5.7%. The soft-drink company is scheduled to report first-quarter results April 20. Its stock trades at a price-to-sales ratio of 4 and a price-to-cash-flow ratio of 15, 20% and 14% premiums to industry averages.

Dogs of the Dow

The "dogs of the Dow" strategy says investors ought to buy the 10 stocks offering the largest dividend payments. They're called dogs because they tend to be the biggest laggards. As stock prices fall, dividend yields rise.

1. AT&T

(T) - Get Report

yields 6.5% with a payout ratio of 78%.

2. Verizon

(VZ) - Get Report

yields 6.3% with a payout ratio of 146%.

3. DuPont

(DD) - Get Report

yields 4.2% with a payout ratio of 85%.

4. Pfizer

(PFE) - Get Report

yields 4.2% with a payout ratio of 49%.

5. Merck

(MRK) - Get Report

yields 4.1% with a payout ratio of 28%.

6. Kraft

(KFT)

yields 3.8% with a payout ratio of 57%.

7. Chevron

(CVX) - Get Report

yields 3.5% with a payout ratio of 51%.

8. Coca-Cola

(KO) - Get Report

yields 3.3% with a payout ratio of 57%.

9. McDonald's

(MCD) - Get Report

yields 3.2% with a payout ratio of 51%.

10. Johnson & Johnson

(JNJ) - Get Report

yields 3% with a payout ratio of 45%.

Of the dogs, two stocks stand out as attractive bargains. They follow on the next page.

Best Bets of the Dogs

Drugmaker

Pfizer

sells for a price-to-projected-earnings ratio of 7.4, a price-to-book ratio of 1.5 and a price-to-cash-flow ratio of 8.3, 41%, 66% and 38% discounts to peer averages. Its PEG ratio of 0.2 signals a massive bargain relative to growth expectations. It was the fifth worst-performing Dow stock during the first quarter, making it an attractive time to buy shares. To boot, Pfizer ranks as the fourth highest-yielding stock in the Dow, offering outsized quarterly payments with a safe payout ratio of 49%.

Of analysts following Pfizer, 18, or 70%, rate its stock "buy," four rate it "hold" and two rank it "sell."

Deutsche Bank

(DB) - Get Report

expects the stock to advance 46% to $25.

JPMorgan

(JPM) - Get Report

UBS

(UBS) - Get Report

and

Credit Suisse

(CS) - Get Report

predict it will hit $24, leaving a potential 40% gain. A whopping 28, or 93%, of Pfizer's 30 largest shareholders purchased more shares during the fourth quarter. One reduced its position and one retained the size of its bet. Any investor with a long-term horizon should consider Pfizer.

Oil and gas giant

Chevron

is also too cheap to pass up. It trades at a price-to-projected-earnings ratio of 8.1, a price-to-sales ratio of 1 and a price-to-cash-flow ratio of 8, 43%, 64% and 13% discounts to industry averages. Its PEG ratio of 0.3 is 75% less than the industry average, emitting a strong "buy" signal. Chevron has gained just 1% in 2010, ranking as the 11th worst-performing component. It's the seventh highest-yielding stock in the index, offering an annualized yield of 3.5% with a safe payout ratio of 51%.

Of researchers covering Chevron, 18, or 75%, advise purchasing its shares and six recommend holding them.

Macquarie

(MQBKY)

and

Citigroup

project a price target of $97, leaving a potential 22% gain.

Barclays

(BCS) - Get Report

predicts Chevron will hit $96 and

Raymond James

(RJF) - Get Report

expects it to hit $95. Of its largest shareholders, 11, or 55%, amplified their bets during the fourth quarter while eight decreased holdings and one remained steadfast.

State Street

(STT) - Get Report

and

BlackRock

(BLK) - Get Report

purchased additional shares.

-- Reported by Jake Lynch in Boston.