Investing

7 Greatly Undervalued Dow Stocks for Upside and Dividends in 2020

It has been undeniable that stocks have enjoyed more than an impressive recovery and continued rally to all-time highs in 2019. The Dow Jones industrial average was up about 21% on a total return basis so far in 2019, and that great gain is even less impressive than almost a 27% gain for the S&P 500 and more than 34% gain for the tech-heavy Nasdaq-100 Index. What is now more important than looking backward is looking ahead. That brings 2020 into prime focus.

Investors have a lot to consider as 2020 gets closer. There is an impeachment process, an announced but unsigned phase-one trade deal with China, and an upcoming election that is likely to be quite nasty. There may even be some new tax changes coming in 2020 as well. 24/7 Wall St. has already tracked the forecasts from top firms calling for 3,300 to 3,400 on the S&P 500 in 2020. That would imply another 6% gain or so, without considering dividends on individual stocks.

One thing that is changing ahead is that many investors now believe it’s time to go back to individual picks rather than solely betting on the rising tide of the indexes to lift all ships. Some strategists see value finally winning the day, while other strategists want to be more aggressive. Chasing the stock market for 6% gains after a 200% rally since the change of the last decade might be too much risk for some investors. After all, a rapid change in government policies or an unexpected geopolitical event could do far more damage to the indexes now that they have risen so much.

24/7 Wall St. has identified seven of the 30 Dow stocks to which value investors and others may flock. These are either cheap on a relative valuation basis or they may be cheap against prior highs or against their Refinitiv consensus analyst target prices. We have identified why each name may be too cheap to ignore, but any seasoned investor knows that 1) cheap stocks are cheap for a good reason and 2) that there is no reason they cannot get even cheaper.

Some investors choose to go to the Dogs of the Dow for dividends and value, but this strategy has frequently not performed well. Other investors like to look solely at price-to-earnings (P/E) ratios or other traditional metrics. And some investors just cannot help themselves by looking for Dow stocks that are down handily from their former highs. There is opportunity and risk in any of these strategies, and no investor should buy a stock solely because an analyst, seasoned investor or even a drinking buddy says it’s too cheap to ignore.

If history holds true, some of the down and out Dow stocks are likely to recover. Unfortunately, history also dictates that some of the losers of the Dow are likely to keep disappointing investors and holding back the index’s gains. We have provided some candid criticism on each company, as well as what the implied returns would be, dividend yields and other metrics. Here are seven Dow stocks that are viewed as undervalued for 2020.

Cisco Systems

Cisco Systems Inc. (NASDAQ: CSCO) has been one of the largest leaders in the technology space for years. It has made endless acquisitions and has bought back so much stock over time that some wonder how it hadn’t just taken itself private. Still, Cisco is a slow grower that has a business now more in line with GDP growth than growth of the internet and technology. It also has migrated away from just a sales-stringent environment to more of a recurring revenue model that now includes security and other services more than ever. Cisco has been volatile around earnings, and it has been all but shut out of new business in China, despite having made up with Huawei in years past.

At $46.00 a share, Cisco is down from a 52-week high of $58.26, and its consensus target price is $52.16. That would imply a 13% gain to the analyst’s target, and its shares would have to rise about 27% to hit a new 52-week high. Total return investors can also look at Cisco’s 3.05% dividend yield to add to whatever upside expectations they are looking for.