The 5 Most Undervalued DJIA Stocks For 2012 (AA, BAC, CAT, JPM, UTX, DIA)

January 3, 2012 by Jon C. Ogg

At the start of each year, 24/7 Wall St. reviews and updates price targets looking for stocks which offer the most upside or the least upside for the year ahead.  After looking at Thomson Reuters consensus data, there are several stocks which may significantly outperform the market this year.  We came up with an alternative calculation for predicting the DJIA performance in 2012 and the peak value came to 13,678 for the DJIA.

Of the DJIA components, the five with the most implied upside were Alcoa, Inc. (NYSE: AA), Bank of America Corporation (NYSE: BAC), Caterpillar Inc. (NYSE: CAT), J.P. Morgan Chase & Co. (NYSE: JPM), and United Technologies Corporation (NYSE: UTX). If the model is right on the near-12% gains, then the peak on the SPDR Dow Jones Industrial Average (NYSE: DIA) would be roughly $136.47 assuming that the ETF tracks the index tick by tick. Remember, that “cheapest” does not always mean that these stocks will go much just higher just because an analyst thinks so.  There is a saying that “cheap stocks usually get cheaper.”

Alcoa, Inc. (NYSE: AA) closed out 2011 at $8.65, leaving an implied price target gain of 44.2% to the $12.48 consensus price target.  Alcoa’s game is simple and that is that it has to still maintain that the aluminum market can double by the year 2020.  Shares were brutalized last year as the 52-week range was $8.45 to $18.47.  It is hard to imagine that this was a $30 stock and higher before the recession.

Bank of America Corporation (NYSE: BAC) is of course the “most upside” stock because it was the worst performing DJIA stock of 2011.  It lost more than half of its value.  At $5.56, it has an implied upside of what is truly unbelievable at 72.3% to the $9.58 target.  This frankly sounds too good to be true even if Warren Buffett tried to prop it up.  The problems are almost too great to bother naming here at BofA.

Caterpillar Inc. (NYSE: CAT) is heavily dependent on emerging markets for mining and infrastructure, so it is of course highly cyclical.  The 2011 close-out price of $90.60 compared to a 52-week range of $67.54 to $116.55.  The consensus Thomson Reuters price targets of $114.50 implies an upside of 26.3% and the dividend is about 2%.  As go the emerging economies, as goes Cat!

Read Also: Is Apple Still Great for 2012?

J.P. Morgan Chase & Co. (NYSE: JPM) is hard to argue against for a management team, but it is in the battered banking sector.  This now trades well under book value and the sector is its anchor.  If the sector improves, investors will probably seek safety behind Jamie Dimon.  At $33.25, there is an implied upside of 39.3% to the $46.33 price target from Thomson Reuters.  Keep in mind that the 52-week trading range is $27.85 to $48.36 so even the leader is down by a third of its value.

United Technologies Corporation (NYSE: UTX) was a bit surprising to see on the list as the conglomerate was shown to have 21.5% upside from the current $73.09 price to a target of $88.79.  That would still not even be a year high, as the range of the last year was $66.87 to $91.83.

These were meant to just be some of the caveats and expectations for the 5 DJIA components with the most implied upside of the 30 components making up the index.  As we noted with out implied 13,678 peak value in the DJIA for 2012, it almost sounds too good to be true.

There is something to consider, and it may be serious.  What happens when you question your own numbers that a model generates?

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JON C. OGG