The worst of the Dow

Alcoa, Bank of America and Boeing are 3 of the lowest-ranked Dow stocks, according to measures that take emotion out of the equation.

By TheStreet Staff Feb 1, 2010 2:09PM

TheStreetBy David MacDougall, TheStreet

 

Dow stocks account for some of the biggest and most respected companies in the world from a range of industries, such as Wal-Mart (WMT), Exxon Mobil (XOM) and Microsoft (MSFT).

 

The Dow Jones Industrial Average, which contains 30 companies, is a gauge for equity performance, a benchmark for large-cap mutual funds and a proxy for the American economy. The Dow fell 3.1% last month, the steepest decline since February 2009. That doesn't mean investors can't make money. The simplest way for a manager to beat the stock market, in theory, is to pick the most attractive Dow stocks.

 

This week, TheStreet will rank the Dow components based on our quantitative model, which takes into account financial strength, volatility, growth potential, performance and dividends, to project those most likely to fare well in the coming year. Here are the stocks at the bottom of the barrel:

 

While these stocks may be the least favored, it's important to note that none carry "sell" ratings.

 

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No. 30 Alcoa (AA)

 

Alcoa, a Pittsburgh-based aluminum company, recently reported fourth-quarter earnings that fell short of analysts' expectations. The model rates Alcoa "hold" with a grade of C-minus mainly due to poor growth prospects and high volatility. Alcoa has posted a negative return on equity of 8.12% over the trailing 12 months on a negative operating margin due to weak sales. Analysts expect revenue to grow by about 17% in 2010, so the tables could turn quickly, but the model is still leery of stock-price volatility. With a dividend yield of 0.9%, Alcoa is on the low end of Dow stocks and also lags behind many of competitors.

 

No. 29 Bank of America (BAC)

 

Bank of America spent much of 2009 rated "sell" but was recently upgraded to "hold" as volatility has eased and earnings are improving. The outsized debt-to-equity ratio drags on the stock's rating, but the bank's efforts to improve its leverage level have helped with the upgrade. If the share price stabilizes, another upgrade is possible.

 

Changes to the capital structure can take a long time to iron out, so the financial-strength score is likely to stay depressed for a while. The stock's gain of 126% during the past year has helped the rating, but not enough to outweigh risks.

 

No. 28 Boeing (BA)

 

Boeing has been brought down to Earth over the massively delayed Dreamliner airplane, but the ratings model has found several other areas of concern. With many airlines cutting orders, the growth component of Boeing's ratings score has dropped significantly. The company has bounced between profits and losses in 2009, and until orders pick up, it's difficult to expect permanent profits. Concerns over sluggish economic growth and the government's defense-spending cuts leave the future cloudy.

 

Financial stability also is a worry. The company had a negative shareholders' equity level in the third quarter but popped back above water after releasing fourth-quarter results. Once fourth-quarter results are factored into the model, Boeing could swing upward in the rankings, but its score is low enough to make an upgrade to "buy" only a remote possibility.

 

Find the next three Dow losers at TheStreet

 

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