BOSTON (TheStreet) -- Large-cap companies are selling at bargain-bin prices despite strong stock gains in the past two months. Investors considering increasing equity holdings should consider Dow stocks first and foremost. Not only do they offer some of the highest dividend yields in the U.S., but they also trade at discounts to respective industry averages.

Chevron

Currently, Coca-Cola ( KO) and JPMorgan ( JPM) are the highest-rated Dow stocks, but third-ranked Chevron ( CVX), the world's second-largest energy company, is a better value investment, according to TheStreet's quantitative equity model.

Chevron reported third-quarter results last week, missing analysts' adjusted earnings consensus by 13% and their revenue forecast by 1.9%. Despite the downside surprise, Chevron's stock fell just 2.2% as a result of the earnings announcement.

Net income declined 1.7% to $3.8 billion and earnings per share dropped 2.6% to $1.87. Revenue grew 7.6% to $46 billion. The net profit margin tightened from 8.9% to 8.1%. For the first nine months of 2010, Chevron's diluted earnings soared 84% to $6.84 a share. Chevron is beginning a share-buyback program between $500 million and $1 billion per quarter, starting in the fourth quarter. In the third quarter, shares outstanding increased marginally from the year-earlier tally. Oil-equivalent production climbed 1% to 2.7 million barrels per day.

The sell-side is bullish on Chevron. Of researchers evaluating the company, 19 advise purchasing its shares and six recommend holding. None advocate selling. In contrast, Exxon Mobil ( XOM), the larger oil-and-gas Dow component, receives just nine "buy" ratings, 12 "hold" calls and one recommendation to "sell." Chevron's median 12-month price target of $94.73 suggests that the stock will return 15%, excluding dividends. The stock pays a quarterly distribution of 72 cents, equal to a yield of 3.5% and a safe payout ratio of 33%.

Chevron sports a three-year dividend growth rate of 8.4% and a five-year growth rate near 11%. Barclays ( BCS), ranked as the best equity researcher for seven consecutive years by Institutional Investor, is bullish. It has a $110 price target on the stock, the highest on the Street, predicting an advance of 34%. Valuation is compelling. Chevron trades at a trailing earnings multiple of 9.8, a forward earnings multiple of 8.4, a book value multiple of 1.6 and a sales multiple of 0.9 -- 39%, 44%, 65% and 54% discounts to oil-and-gas industry averages.

Compared to the other 29 Dow stocks, which also offer safety and yield, Chevron outperforms on a variety of investment criteria. It is the fifth-cheapest Dow stock based on forward earnings and cash flow. It offers the seventh-highest dividend yield. It is the third-cheapest based on trailing earnings. And its PEG ratio, a measure of value relative to predicted growth, of 0.2 reflects an 80% discount to estimated fair value. Put simply, Chevron is an all-star Dow stock.

Most relevant is Chevron's burgeoning cash balance. In the third-quarter, cash, equivalents and marketable securities nearly doubled from the year-earlier tally to more than $14 billion. Total debt increased marginally to $11 billion, giving Chevron a net liquidity position of more than $3 billion. This cash can be deployed internally to fund exploration projects, externally to purchase competitors or it can be used to directly benefit shareholders by extending or amplifying share buybacks or boosting the quarterly dividend.

Six other Dow companies boast net liquidity positions: industrial conglomerate 3M ( MMM), Cisco ( CSCO), Microsoft ( MSFT), Intel ( INTC), Johnson & Johnson ( JNJ) and Exxon Mobil.

Institutional investors are buying Chevron on the cheap. Of the stock's largest 30 owners, 17, including JPMorgan and Deutsche Bank ( DB), enlarged their positions in the latest quarter as two held steady and 11 lessened their holdings. Add a weak dollar, oil at nearly $85 a barrel, and insatiable energy demand from emerging markets and you have more bullish catalysts for Chevron, which TheStreet Ratings ranks "buy" with a $96.49 12-month price target.

-- Written by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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