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 (NYSE:
, up 108%
, up 75%
McDonald's Corp. (NYSE:
, up 67%
Wal-Mart Stores Inc. (NYSE:
, up 63%
The Walt Disney Co. (NYSE:
, up 59%
Travelers Cos. Inc. (NYSE:
, 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 pretty
On the face of it, these stocks have little in common.
Alcoa Inc. (NYSE:
, 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. (NYSE:
Hewlett-Packard Co. (NYSE:
Merck & Co. Inc. (NYSE:
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. (NYSE:
Johnson & Johnson (NYSE:
, 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 solid
1. Cisco Systems Inc. (Nasdaq:
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
2. The Boeing Co. (NYSE:
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
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. (NYSE:
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. (NYSE:
, 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 housing market.
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 time
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.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO in one or more if its "real money" portfolios.
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