The venerable Dow Jones Industrial Average has been a benchmark for investors since its creation in 1896 by Charles Dow. Twelve stocks made up that first list, which was designed to represent leading American industries. In the 117 years since, many stocks have come and gone for a variety of reasons. After reaching an intraday all-time high at 14546.82 on Wednesday, we thought it may be a good time to review the current 30 names that make up the DJIA and find the stocks that were the most overvalued.
The 24/7 team felt the best measure to examine when determining the most overvalued stocks was taking the analysts consensus price targets and comparing that against where the stocks were actually trading. It is important to remember that the analysts’ consensus is based on the average of every analyst target combined, then divided by the number of analysts covering the stock. Coverage can vary from name to name, but the stocks in the DJIA are some of the most widely covered on Wall St.
Based on our research, here are the six most overvalued stocks in the DJIA:
Even though many analysts are jumping on the bandwagon, including CNBC regular Meredith Whitney, based on our criteria Bank of America Corp. (NYSE: BAC) makes the overvalued list. It pays a meager $0.04 per share dividend, and the Thomson/First Call estimate for this widely owned bank is $12.24. The stock closed yesterday at $12.78. Be advised that many analysts may just be playing catch up here. Meredith Whitney gave a $15 target near-term recently, and Dick Bove gave an ultimate recovery target of $30.
Despite a strong rally from the 52-week lows, former tech high flyer Hewlett-Packard Co. (NYSE: HPQ) has a seat at the most overvalued table. The Wall St. consensus price target for this silicon valley pioneer is $18.30. Closing yesterday at $22.92 puts the stock more than 25% higher than the analysts target. Hewlett-Packard does pay investors a 2.40% dividend.
Safe haven pharmaceutical giant Johnson & Johnson (NYSE: JNJ) has been on a roll since hitting a 52-week low last summer. It trades at 20.60 times earnings, an expensive multiple for a drug stock. The consensus price target is $78. Closing yesterday at $79.45, the stock now trades at a premium to consensus. Johnson & Johnson does pay investors a tidy 3.10% dividend.
Communications giant AT&T Inc. (NYSE: T) also makes our overvalued list, despite paying investors a generous 5% dividend. Closing yesterday at $36.19 puts the stock near the consensus price target of $36.64. With wireline losses mounting and the constant margin pressure of the wireless business, AT&T may be a candidate for selling.
Spun off from Citigroup Inc. (NYSE: C) in 2002, insurance behemoth The Travelers Companies Inc. (NYSE: TRV) receives the overvalued grade. It closed right near a 52-week high at $83.84, and the consensus price target is $83.94. Investors are paid a 2.20% dividend. Travelers is also one of the DJIA stocks that much of the public forgets is even in there.
Last but not least, another DJIA communications giant, Verizon Communications Inc. (NYSE: VZ), rounds out our list of most overvalued stocks. With a $48.60 close, which is just shy of a 52-week high, Verizon trades above the consensus price target of $48.40. With a price to earnings of 159.61 and a solid dividend that has shrunk to 4.20% on stock appreciation, the company faces the same competition and issues as its rival AT&T.
We recently wrote about relative strength momentum investing. Relative strength is a “buy high, sell higher” strategy that assumes a stock with a rising price will continue its upward trajectory. That may be the case for the stocks that make our list. However, If the market happens to roll over and investors experience a much anticipated correction, the stocks on this list may be the first to head downhill.