Undervalued Dow Is a Bargain Here

We believe the Dow is undervalued even using 2008 projections for dividends and earnings.
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Updated from 9 a.m. EDT

By Stockpickr Guest Columnist Greg Donaldson

How cheap are stocks?

You don't hear that question often these days, but we believe that is the appropriate question to ask as we pass through the one-year anniversary of the subprime crisis. Stocks such as

Washington Mutual

(WM) - Get Report

,

Wachovia

(WB) - Get Report

,

Lehman

(LEH)

,

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

all were hit as a result.

Bank write-offs have been staggering, and many analysts believe some of the write-offs will later be recaptured as the markets unfreeze and normal business activity returns to banking and real estate. Even if earnings are not recaptured, losses at some point will cease, and the banks will again begin reporting earnings. Thus, the earning we are seeing today for the major indices are understated significantly from what they are likely to be two to three years down the road.

Having said this, we believe the

Dow

is undervalued even using 2008 projections for dividends and earnings. We have computed the "fair value" of the Dow Jones Industrials using current data from S&P on 2008 projected dividends, earnings and AAA corporate bonds yields.

Using these assumptions, we then ran the the data through our valuation model, and we arrived at a fair value of 13,500.

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