Should You Consider These 3 Dow Stocks Sitting Out The Rally?

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On March 26, 2012, the Dow Jones Industrial Average closed at 13,241. Fast forward exactly one year, and the collection of 30 of America’s blue-chip stocks is up more than 1,200 points, representing a 9% return over the past year. While the Dow has surpassed even optimistic investor expectations over that time, there are a few Dow components that haven’t joined in the rally.

If you’re an investor who looks to buy the market’s unloved and unwanted stocks, here are three companies within the Dow that may be ripe for the picking. As a result of their declines over the past year, these stocks offer more attractive valuations than the broader market as well as dividend yields that surpass the yield on the broader S&P 500 Index.

The tale of two tech titans

Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC) are two of the technology sector’s juggernauts, whose fortunes are equally linked to the personal computer, at least for the time being. Both stocks have displayed disappointing performance over the past year, as the often-cited theory that the PC is dead technology may actually have a ring of truth.

Microsoft’s share price has declined 13% over the past 52 weeks, due largely to the fact that its diluted earnings per share fell 26% in fiscal 2012, year over year. These results included a hefty $6.2 billion goodwill impairment charge related to its Online Services Division, which dragged down its diluted EPS by $0.73 per share. Investors are likely frustrated by the company’s ongoing habit of spending money on projects like its Bing search engine that just aren’t working, and the drop in the company’s share price only serves to exacerbate this problem.

Furthermore, Microsoft didn’t get off to a great start to fiscal 2013, with revenue dropping 2% during the first six months of the fiscal year as compared to the first two quarters of fiscal 2012. Moreover, diluted earnings per share continued to suffer, dropping more than 12% over the first six months.

Like its large-cap technology peer, Intel hasn’t been able to escape criticisms that its business is akin to buggy-whip technology. The semiconductor giant has lost a full quarter of its market value over the past year due to operating results over that time period that left a lot to be desired.

Indeed, Intel’s fourth-quarter and full-year results were both poor. There’s no denying the fact that earnings for the quarter dropped 27% year over year. Revenues fell 3% versus the prior year’s fourth quarter, and the company expects another 6% decline in revenues for the current quarter. For the full-year, revenues and earnings per share dropped 1.2% and 11%, respectively.

This industrial can’t excavate itself out of the doldrums

Caterpillar (NYSE: CAT), one of the world’s largest providers of industrial machinery, seemed to be doing everything right when it reported full-year 2012 results. The company reported record revenue and earnings per share for fiscal 2012 of $66 billion and $8.48 per share, respectively. Revenue increased 10% year over year, and EPS climbed 15% as compared to the prior year.

Unfortunately, there were hidden warning signs in Caterpillar’s report, and the news since has been less than flattering. In its full-year 2012 report, management provided a 2013 outlook that likely left investors disappointed. The company expects revenue to be in a range of $60 to $68 billion, and earnings of $7 per share to $9 per share. That means that the midpoint of each range would represent a decline from Caterpillar’s 2012 performance.

The company’s outlook reflects the ongoing economic uncertainties in the current global economy. In particular, Caterpillar management noted that growth in China is likely to fall short of the growth seen in 2010 and 2011, and the debt crisis in Europe continues to be an ongoing concern. These fears materialized earlier this year, when the company announced that global equipment sales in the three month period through February fell 13%.

Where do we go from here?

With regard to Microsoft and Intel, my perspective is that rumors of the PC’s demise are greatly exaggerated, particularly at the enterprise level. Both Microsoft and Intel are cash-generating machines, which provide investors the margin of safety of billions of dollars in cash on the balance sheet as well as low valuations.

There’s no doubt that Caterpillar has taken a beating over the past year, as its shares have lost 20% of their value during the period. On the plus side, shares are relatively inexpensive, exchanging hands for just 8 times trailing earnings. Of course, what matters most for the company is how it will perform in 2013—which is a point of legitimate concern for the market. The news coming out of the company for the first few months of this year doesn’t bode well.

That being said, each of these three companies offers investors sound financial positions and hefty dividend yields, in addition to very modest valuations. Microsoft and Intel currently offer dividend yields of 3.3% and 4.25%, respectively. Although Caterpillar’s dividend yield is lower, at roughly 2.5%, that still beats the yield on the S&P 500, which is currently around 2%.

If you’ve got thick skin and a tolerance for buying stocks that everyone else wants to sell, there may be no better opportunity to snatch up these highly profitable American blue chips. They’ve been beaten down over the past year and are being left in the bargain bin. As Warren Buffett famously quipped, if you wait for the robins, spring will be over. Investors looking for high dividend yields and cheap valuations should consider each of these stocks.


Robert Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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