The Dow Jones Industrial Average recently exceeded the
previous record of 14,164 reached in October 2007. Of course, a
number of components in theindex returned to their peak much
sooner and are now handily above levels seen in 2007. The
beststocks of the Dow since then include:
The Home Depot (
, up 108%
, up 75%
McDonald's Corp. (
, up 67%
Wal-Mart Stores Inc. (
, up 63%
The Walt Disney Co. (
, up 59%
Travelers Cos. Inc. (TRV)
, up 53%
If the Dow was only composed of outperforming stocks such as
these, then we would have already surpassed 20,000. Of course,
the index also has its share of dead weight. In fact, 12 of the
Dow's 30 companies remain underwater when compared with that 2007
peak (prior to the inclusion ofdividend payments). It's not a
On the face of it, these stocks have little in common.
Alcoa Inc. (AA)
, for example, is an extremely well-run company that is suffering
from a global slump in aluminum prices. The company is arguably
much healthier than it was in 2007, thanks to a series of
streamlining moves, so it could be poised for greatgains once the
But stocks such as
Bank of America Corp. (BAC)
Hewlett-Packard Co. (HPQ)
Merck & Co. Inc. (MRK)
deserve the beat-down they've gotten. These companies failed to
adapt to changing times and instead lurched into new businesses
that simply weighed them down.
But is it unfair to characterize Merck as a loser when all of
Big Pharma has suffered frompatent expirations? Well,
Pfizer Inc. (PFE)
Johnson & Johnson (JNJ)
, both Dow components, have seenshares rise by double digits
since that late 2007 peak. These companies are nicely diversified
and don't completely depend on blockbuster drugs for their sales
and profits. Still, it's useful to look at this group of losers
to see which are capable of regaining lost luster. Of the
12laggards listed on the table above, three of them stand out as
1. Cisco Systems Inc. (Nasdaq: CSCO)
I recently spelled out why I see Cisco as a rejuvenated company,
noting that its significant cash-flow generation provides ample
downside support in case the market swoons anew. As forupside , a
number of Cisco's end-markets have been constrained, but should
look healthier in coming years, which could help thisstock shed
its ultra-low valuation metrics.
2. The Boeing Co. (BA)
I also remain a big fan of the world's largest airplane maker,
even after huge setbacks for its new Dreamliner plane, and a new
era of smaller defense spending.
As I wrote in October 2012, Boeing generates very strongcash
flow , which should help to support higher dividends and share
buybacks. Since I looked at Boeing five months ago, shares are up
23%, and would likely have done even better were it not for the
Dreamliner's exploding battery problems.
Now that Boeing appears to have fixed the Dreamliner's battery
technology, shares are taking off. Investors can again see what
kind offree cash flow Boeing can generate, now that the plane's
production lines are ready to gear up anew. Boeing is on track to
generate more than $6 billion in free cash flow this year, and
that figure could approach $7 billion by 2015 if the worst-case
scenario of defense cuts is avoided.
3. Bank of America Corp. (BAC)
I noted earlier that this stock deserved every ounce of
punishment. Indeed, during the past few years, I repeatedly wrote
about the virtues of better banks in the space such as
Citigroup Inc. (C)
, which has managed to win back many lost fans.
Yet it's time to look ahead as it increasingly looks as if
Bank of Americawill take a page out of the Citigroup playbook.
Citigroup came out of therecession in bloated shape and moved too
slowly to pare costs to bring marginsback up . New management has
taken a more aggressive approach to Citigroup's expense
structure, which is a bigfactor behind the stock's rebound.
Now it's Bank of America's turn. Althoughrevenue will likely
be flat from 2013 to 2014 at about $90 billion, the bank's
management has laid out plans to pare roughly $5 billion
inoperating expenses . That's whyanalysts seeearnings jumping
around 30%, to $1.30 a share; and in the context of a slightly
firmereconomy in 2015, Bank of America should boost profits at a
double-digit pace yet again. After all, the operation remains a
topmortgage lender nationally, and should benefit from a firming
Meanwhile, shares trade at about 85% of tangiblebook value . I
look for tangible book value to grow by 10% during the next two
years, and the price-to-book ratio eventually to move up to 1.
That should help provide 25% upside for the stock during that
Risks to Consider:
Profit forecasts for these Dow components are predicated on a
resurgent U.S. economy; it's unclear if the currentissues in
Washington will derail the economy's momentum.
Action to Take -->
With many stocks posting considerable gains, it's time to pivot
to stocks that haven't been fully appreciated. These Dow laggards
have begun to rise in price in recentquarters , and as they move
back into favor, further upside lies ahead.
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