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Dow Stocks -- Crossing Over to 'Buy'

Dow stocks such as Exxon, Caterpillar and DuPont have suffered from weak demand, though the turnaround is just over the horizon.

(, starting yesterday and ending Friday, is reviewing all 30 Dow stocks after the index fell 3.1% last month, the steepest drop since February 2009. Six Dow stocks will be featured each day.)



) --

Dow stocks

represent the largest and most solid companies in the U.S. Yesterday's review of the six lowest-rated

Dow stocks

showed that even those in a funk --


(AA) - Get Alcoa Corporation Report


General Electric

(GE) - Get General Electric Company Report


Bank of America

(BAC) - Get Bank of America Corp Report

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-- have great staying power.

Selecting the top Dow stocks is no easy task. This week,

is ranking the Dow components based on our proprietary quantitative model, which takes into account financial strength, volatility, growth potential, performance and dividends, to project those most likely to fare well in the coming year.

Today's batch of Dow stocks finally features some "buy"-rated companies. This group starts to get into the strong heart of the Dow -- huge companies with strong financials and good profitability with little price volatility.



(XOM) - Get Exxon Mobil Corporation Report

P/E: 16.4 (Integrated Oil and Gas Average: 21.4)

Debt/Capital: 7.4% (Integrated Oil and Gas Average: 29.9%)

5-Year Growth Rate: 5% (Integrated Oil and Gas Average: 21.6%)

Exxon experienced phenomenal revenue growth amid skyrocketing oil prices in 2007 and 2008. Since the financial meltdown, oil prices have crashed to a more reasonable level, and Exxon has suffered as a result. Not to say that the company is struggling, but greatly reduced prices have led to falling revenue and profit. Such deterioration hurt the growth score generated by the model, which was a major weight on the rating as a whole.

The performance of Exxon's stock, also a concern for the model, is linked to the drop in oil prices. Over the past 52 weeks, Exxon has fallen 16%. Anticipated low growth can be easily seen in the company's PEG ratio, which stands at an extremely high 2.7, suggesting low growth compared to the current valuation. Exxon's dividend yield of 2.6% is strong, but is slightly lower than other industry competitors, which have yields closer to 4%. Bolstering the company are strong financials and a fairly stable price over the past few months, which has improved the volatility score. Exxon has a grade of C-plus and is rated as a high "hold."



(DD) - Get DuPont de Nemours, Inc. Report

P/E: 16.2 (Chemicals Average: 22.5)

Debt/Capital: 59% (Chemicals Average: 45.8%)

Current Ratio: 1.8 (Chemicals Average: 1.8)

DuPont's stock has advanced 42% over the past 52 weeks, which has helped the performance score from the model, but growth is weighing down the rating. A growth score of 1.78 is the fourth-lowest of all Dow components and is echoed in the company's high PEG ratio of 1.64. Revenue has stagnated, although the company has returned to profit and beat earnings expectations.

Financial strength is another main concern for DuPont. A financial-strength score of 4.94 is on the low end of the Dow components and suggests the company may be overly reliant on debt financing. The company's dividend yield, on the other hand, is high at 5%, which is helping to improve its rating. With a grade of C-plus, DuPont is on the border of "buy" and "hold," but poor growth and a fair amount of leverage is holding it in the "hold" range. As business conditions improve, DuPont should be one of the first stocks to move into the "buy" range.



(CAT) - Get Caterpillar Inc. Report

P/E: 27 (Industrial Engineering Average: 29.6)

Debt/Capital: 77.2% (Industrial Engineering Average: 37.7%)

Current Ratio: 1.4 (Industrial Engineering Average: 1.7)

Caterpillar is the highest "hold"-rated Dow member and falls short of the top tier due to volatility and slow growth. With a beta value of 1.8 the stock is more volatile than the market, and its growth score of 2.4 is quite low.

On the positive side, the stock has jumped nearly 70% over the past 52 weeks and is looking very strong financially. The downturn hasn't been kind to the machinery company, due to its ties to the construction market, but the future looks bright and investors have bought heavily on expectations of a big-time turnaround this year and next. Caterpillar has a grade of C-plus.



(CVX) - Get Chevron Corporation Report

P/E: 14.2 (Integrated Oil and Gas Average: 21.4)

Debt/Capital: 21% (Integrated Oil and Gas Average: 29.9%)

5-Year Growth Rate: 6% (Integrated Oil and Gas Average: 21.6%)

Chevron is often included in oil-and-gas stories as a sidekick or little brother to Exxon. Ratings' model sees the relationship differently. Chevron is the first "buy"-rated stock to appear as you read up from this list. It's ahead of its overshadowing industry mate. With a bigger dividend yield and stronger financials, Chevron edges Exxon in the eyes of the model.

The company has similar concerns as Exxon, with falling annual revenue and stock performance that lags the index. But its stability and yield are favored by the model. Since the model has a safety-first bias, strong financials and current income with little volatility tip the scales in favor of more conservative investments. Chevron has a grade of B-minus.


Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

P/E: 20.7 (Telecom Equipment Average: 32.3)

Debt/Capital: 21% (Telecom Equipment Average: 27%)

Current Ratio: 3.2 (Telecom Equipment Average: 2.5)

Cisco displays rock-solid financials, much like Chevron. Cisco releases its earnings report this week, which could push its rating higher if the company beats expectations. As is, Cisco is situated comfortably in the "buy" range.

Cisco's stock has advanced 50% over the past 52 weeks, bolstered by strong performance numbers, such as a return on equity of 15.25% and an operating margin of higher than 20%. More moderate volatility has aided the stock's rating. This is a company that could see a substantial increase in a turnaround as companies upgrade their technological infrastructure. Cisco is an oddity among Dow components because it doesn't pay dividends. While this hurts the rating, Cisco's other attributes are strong enough so the company can maintain its "buy" rating.

Note: After


(BA) - Get Boeing Company Report

recent earnings release, in which the company beat analysts' estimates, Boeing is now ranked ahead of Cisco as the 20th-best stock in the Dow, with a "buy" rating.


JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

P/E: 14.7 (Banking Average: 26.6)

P/Free Cash Flow: 1.5 (Banking Average: 10.1)

1-Year Revenue Growth: 13.93% (Banking Average: 12.3%)

JPMorgan has outdone its other financial competition in the Dow. It's the only "buy"-rated finance company in the index. The strong financials of JPMorgan are an oddity for banks, especially lately, and more than make up for the week dividend yield of only 0.5%.

JPMorgan has rallied 53% in the past year and has done so with extremely low volatility for a finance-related holding. A beta value of just 1.2 is much lower than that of Bank of America or

American Express

(AXP) - Get American Express Company Report

, which have betas well in excess of 2. JPMorgan's most recent earnings beat analysts' expectations, helping the company boost its performance score to a respectable 5.7, better than some of the top 5 Dow components. Investors looking to bet on the banking industry without the risks associated with Bank of America should look at JP Morgan as an alternative. It has a grade of B-minus.

-- Reported by David MacDougall in Boston.

Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.