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Pfizer, Chevron Represent Dow's Best Buys

Pfizer and Chevron rank as the two cheapest Dow stocks based on projected growth forecasts.
Author:

BOSTON (TheStreet) -- Companies that were cheap before the stock-market correction have become steals during the rout.

Two that stand out are

Dow

components

Chevron

(CVX) - Get Report

and

Pfizer

(PFE) - Get Report

. Those mega-caps trade at massive discounts to industry averages and offer fat dividend yields. Although there's still contagion risk from Europe's debt crisis, long-term investors should consider dollar-cost averaging -- buying a set dollar amount at specific intervals.

Pfizer is the world's largest pharmaceutical company, with a diversified line-up of prescription medicines for people and animals. During the past three years, Pfizer has expanded revenue 4.5% annually, on average, as profit narrowed 25% a year. Pfizer's stock declined 19% a year over the same period.

Quarter

: First-quarter profit dropped 26% to $2 billion, or 25 cents a share, as revenue increased 54%. The operating margin fell from 41% to 27%. Pfizer has $17 billion of cash and $46 billion of debt, equal to a quick ratio of 1.2 and a debt-to-equity ratio of 0.5. Its quarterly return on equity declined to 8.8%.

Stock

: Pfizer has risen 1% in the past year, less than U.S. indices. It trades at a price-to-projected-earnings ratio of 6.4 and a price-to-book ratio of 1.3, 46% and 67% discounts to peer averages. Its PEG ratio, a measure of value relative to projected growth, of 0.2 reflects an 80% discount to estimated fair value.

Consensus

: Of analysts covering Pfizer, 19, or 73%, advise purchasing its shares, five recommend holding and two suggest selling them.

Deutsche Bank

(DB) - Get Report

offers a price target of $25, leaving a potential return of 71%.

UBS

(UBS) - Get Report

and

JPMorgan

(JPM) - Get Report

predict that the shares will advance another 64% to $24.

Credit Suisse

(CS) - Get Report

says they will hit $22.

Catalyst

: Undervalued blue chips currently offer the market's best bets. They are likely to drop less in a sell-off because of relative safety and rise higher in a rally because of relative value. Pfizer's PEG ratio ranks it as the cheapest Dow stock. It offers a yield of 4.9%, with a safe payout ratio of 61%. It recently raised its quarterly dividend from 16 cents to 18 cents.

Chevron is an integrated oil and gas company, ranking behind

Exxon Mobil

(XOM) - Get Report

TheStreet Recommends

as the second-largest U.S. energy company, based on annual revenue. During the past three years, its sales have slipped 3.1% annually, on average. Its stock has outperformed the Dow since 2007, falling just 11% as the Dow tumbled 27%. Chevron is down 7% in 2010.

Quarter

: First-quarter profit more than doubled to $4.6 billion, or $2.27, as revenue grew 35%. The operating margin widened from 6.2% to 15%. Chevron holds $11 billion of cash and $10 billion of debt, translating to a quick ratio of 1.1 and a debt-to-equity ratio of 0.1. Its quarterly return on equity fell to 14%.

Stock

: Chevron has risen 4% in the past year, trailing U.S. benchmarks. It sells for a price-to-projected-earnings ratio of 7.3 and a price-to-sales ratio of 0.9, 43% and 87% discounts to peer averages. Its PEG ratio of 0.2 ranks lowest among Dow stocks, signaling an 80% discount to estimated fair value.

Consensus

: Of researchers following Chevron, 19, or 76%, rate its stock "buy" and six rank it "hold." None rate Chevron "sell."

Barclays

(BCS) - Get Report

offers a target of $105, leaving a potential return of 46%.

RBC

(RY) - Get Report

expects the stock to appreciate 39% to $100.

Morgan Stanley

(MS) - Get Report

believes it will climb 35% to $97.

Catalyst

: Chevron is among the cheapest Dow stocks and offers a yield of 4%, with a safe payout ratio of 42%. Since the

BP

(BP) - Get Report

disaster April 20, Chevron has tumbled 11%, less than Exxon,

ConocoPhillips

(COP) - Get Report

and

Royal Dutch Shell

(RDS.A)

. Its value and yield provide investors with a margin of safety.

-- Reported by Jake Lynch in Boston.

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