Why Today's Top 2 Dow Stocks Are Still Great Buys
Jun 27th 2012 6:08PM
Updated Jun 27th 2012 6:14PM
The Dow Jones Industrials Average (INDEX: ^DJI) climbed a respectable 0.74% for the day on the back of a multitude of factors, including better-than-expected housing data on the Case-Shiller index. The go-to measure for reading the housing market's pulse said home prices rose 0.7% from March to April. This news builds on other strong recent data, including housing starts and existing-home sales.
It makes sense, then, that real-estate sensitive stocks JPMorgan Chase (NYS: JPM) and Bank of America (NYS: BAC) were the Dow's biggest winners for the day, closing up 3% and 2%, respectively. Both of these companies have above-average volatility and are crazy cheap compared with historic norms, so it's not unusual to see them near the top of the biggest daily mover rankings.
Both of these stocks lead the Dow for year-to-date return as well. While the Dow has posted a paltry 3.4% gain so far, JPMorgan is up 10.6% and Bank of America is far and away the biggest gainer on the index with a 39.8% run.
There's no doubt that these companies have had their fair share of missteps and bad press. The irresponsible lending and risk taking in high finance is largely credited as the impetus for our economic slowdown. Bank of America's balance sheet could still contain more landmines, and JPMorgan had an embarrassing fall recently with its $2 billion trading loss. Both are considerably larger and less maneuverable banks than in the past and will face heightened capital requirements in the future.
Why, then, are these stocks still great buys, even after outpacing their home index by so much this year? They're cheap, and the risk/reward profile favors a bit of a dice roll if you can stomach the uncertainty. Take a look at their current price-to-tangible book value compared with historical norms.
Even if these companies don't return to their historical averages, just a moderate move in that direction could result in sharply rebounding shares. This is a trend that's repeated to varying degrees all across the finance sector as well, not just with these few winners. US Bancorp (NYS: USB) and Goldman Sachs are similarly cheap compared with historical levels. The fear about the long-term stability of finance has even extended to companies with broader portfolios and more diversification. The uncertainty surrounding GE Capital hung over General Electric (NYS: GE) for years, and even after the announcement of the dividend from the finance arm to the parent company, the company still looks pretty cheap with regard to future earnings and pays a great dividend to boot.
I think the finance sector houses some of the most promising buy-and-hold stocks on the market today. It's certainly not a sector for the faint of heart, but it is where you'll find The Stocks Only the Smartest Investors Are Buying. Legendary investors like Warren Buffet have put their personal money behind some of these stocks, and when it comes to long-term outperformance, that's a guy I trust. Read about why you should own some of these companies.
The article Why Today's Top 2 Dow Stocks Are Still Great Buys originally appeared on Fool.com.Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.
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