For all its quirks, the Dow Jones industrial average remains one
of the most influential market gauges in the world. The Dow still
makes headlines when it hits new highs, and additions to and
deletions from the blue-chip index are watched with interest for
what they show about the shifting composition of the U.S. economy.
At its inception in 1884, the index that would later become the Dow
was almost entirely populated by railroads. In the late 1990s, the
Dow shifted abruptly toward technology with the additions of
Hewlett-Packard, Microsoft and Intel. And when General Motors was
removed in 2009, it was the first time in more than 100 years that
the Dow contained no carmakers. Below you'll find our rating (buy,
hold or sell) on each of the 30 stocks in the Dow. Only two stocks
warrant a sell rating, reflecting our view that the global economy
will continue to grow, albeit modestly. And the holds greatly
outnumber the buys because share prices have advanced so sharply
over the past four years.
10 to buy
1. 3M. (symbol
) The maker of Scotch tape, sealants for airplanes, orthodontic
appliances and much more is a fabulous company that's feeling the
pinch of a slow economy. Company officials recently lowered their
forecast for 2013 profits. But 3M's record of innovation, its
diversified product base and its excellent prospects abroad signal
a bright future. Even better, 3M has raised its quarterly dividend
each year for the past 55 years.
2. Chevron. (symbol
) By investing heavily in exploration in recent years, the
second-largest U.S. energy company has set itself up for years of
solid growth. In 2012, for example, the company replaced the
equivalent of every 100 barrels of oil and gas it extracted with
the equivalent of 112 barrels of new proven reserves. Chevron is
also increasing its exposure to liquid natural gas, with big
projects in Australia and Canada in the works. The firm has boosted
its dividend at an annual pace of 9% over the past five years.
3. Cisco Systems. (symbol
) Cisco is the dominant player in routers, switches and other
networking equipment. The company is seeking to maintain and
sharpen its competitive edge in those areas by shedding lagging
business lines and making acquisitions. But it is also expanding
into faster-growing software and services, all the while
maintaining its enviable profit margins.
4. General Electric. (symbol
)GE has rediscovered its mojo. GE Capital, the finance unit that
caused major headaches during the 2008 financial crisis, is smaller
and healthier than it was a few years ago. The company's core
industrial businesses have sales backlogs large enough to last for
years. And management is increasingly focused on returning cash to
5. International Business Machines.(symbol
) Big Blue is suffering a temporary slump. The tech giant posted
abysmal results in the first quarter, with its hardware and
services units showing sluggish sales. But the company is working
to sell off its least-profitable units and is in the middle of a
vast cost-cutting effort. Once IBM rights the ship, its stock
should deliver stellar gains.
6. Microsoft. (symbol
)Investors who focus on how badly Microsoft is lagging Apple and
Samsung in the mobile-phone wars are looking at Microsoft all
wrong. The company is entrenched in the corporate world, where
sales of its operating systems and applications software throw off
steady streams of cash. The stock is plenty cheap, and Microsoft
has raised its dividend at a 21% annual clip over the past three
7. Pfizer. (symbol
) The world's largest drug maker has been smarting ever since
losing patent protection on the hit cholesterol drug Lipitor in
2011. But with several potential new blockbuster drugs on their way
to market, plenty of cash to keep its massive
research-and-development machine ticking, and a stock that's far
from overpriced, these shares look appealing.
8. Travelers. (symbol
)The seller of business, home, auto and other insurance tends to
err on the side of conservatism when it comes to underwriting
policies and investing its spare cash. That's been a boon in recent
years and has helped fuel Travelers' strong stock-price gains
compared with its peers. Although low interest rates pose a
challenge, Travelers has been able to cope by raising premiums.
9. United Technologies. (symbol
)The maker of elevators, escalators, refrigerators, helicopters,
aircraft engines and more is generating large amounts of cash,
which it's using to buy back shares and pay down debt. Although any
future cuts to U.S. defense spending could hurt results, strong
sales to emerging markets should help keep growth on track.
10. UnitedHealth Group. (symbol
) It isn't easy for new competitors to put together a network of
health providers, so UnitedHealth, the nation's largest health
insurer, holds formidable advantages. Health care reform has been a
mixed bag for business, bringing in new patients while increasing
regulation. But the company's number-one position and the stock's
attractive valuation tip the scales here.
18 to hold
1. American Express (symbol
).The credit card giant is a great company in a fine industry.
Credit card companies have strong competitive advantages (it's not
easy for newcomers to set up a network). And Amex's cardholders
tend to be affluent, to spend a lot and to pay their bills on time.
But with the shares up 32% this year (results are through May 31)
and consumer spending sluggish, this isn't the time to load up.
2. AT&T (symbol
).Competing fiercely with Verizon Wireless, AT&T has seen its
results suffer in recent years because of the subsidies it offers
to iPhone buyers. Dwindling use of landline phones is another
headache. But AT&T throws off plenty of cash to support its
hefty dividend, so there's no reason for investors to sell.
3. Bank of America (symbol
).BofA has made big strides in cleaning up its problem loans and
settling lawsuits with investors who bought bum mortgages from it.
But its stock has soared 86% just in the past year, putting it
close to the $14 price target mentioned in our story
4 Big-Bank Stocks Worth a Buy
However, with loan and legal woes ongoing, demand for new loans
still tepid, and management trying to wrestle a bloated cost
structure into submission, investors should sit tight for now.
4. Boeing (symbol
).Investors breathed a sigh of relief when Boeing announced that
regulators had approved its fix for faulty batteries on the
company's new 787 Dreamliner planes, which had been grounded for
four months. But the Dreamliners haven't been the only things
taking off; the stock has climbed more than 30% this year, making
these shares rich.
5. Caterpillar (symbol
). As the world's largest maker of construction and mining
equipment, Caterpillar is a terrific company in an industry that's
closely tied to economic cycles. The firm's CEO has said the global
mining industry is close to a bottom, which would be a positive for
Caterpillar. But we think continued economic weakness, plus an
inventory backlog among the company's dealers, merit a patient
6. Coca-Cola (symbol
). Although health-conscious Americans and other developed-market
consumers are drinking fewer sugary sodas, rising living standards
in emerging nations leave consumers there with more money to spend
on wants rather than needs. The world's largest beverage company
has boosted its dividend in each of the past 50 years, but the
stock is on the pricey side.
7. DuPont (symbol
).Once predominantly a chemical company, DuPont has become
increasingly dependent on its agriculture business, which sells
seeds and pesticides, to drive growth in recent years. But DuPont
lags rival Monsanto in agriculture, and sales could continue to be
sluggish in its core chemicals business for some time. A fine
dividend, however, makes DuPont a hold.
8. ExxonMobil (symbol
). As more of the world's easy-to-exploit energy resources are
exhausted, Exxon's main challenges are to make new discoveries and
bring them online fast enough to replace depleted reserves.
Fortunately, Exxon has unrivaled resources for exploration and
acquisitions, with plenty of cash left over to buy back shares and
fund its dividend.
9. Home Depot (symbol
). The largest home-improvement retailer, Home Depot has benefited
in recent years from an overhaul in how it stocks and prices the
merchandise on its shelves. But the shares, which tend to move in
sync with the housing market, have already rallied sharply in
anticipation of continued improvement in real estate prices.
10. Intel (symbol
).The Silicon Valley icon is playing catch-up to rival ARM when it
comes to producing semiconductors that power smart phones and
tablets. But Intel has a massive research-and-development budget
with which to address these woes. Moreover, all those mobile
devices must connect to servers to deliver Web sites, videos and
other content, and Intel dominates the server-processor market. Its
dividend is well supported by profits. Investors should hold
11. Johnson & Johnson (symbol
).The maker of drugs, medical devices and consumer products has
faced a string of product recalls and lawsuits in recent years. Yet
J&J's future remains bright, thanks to its excellent drug
portfolio, deep pockets and diversified product base. However,
after surging 39% in the past year, the stock is tough to get
12. JPMorgan Chase(symbol
). Some of the bank's woes are self-inflicted, such as last year's
embarrassing $6 billion trading loss. But many, such as weak loan
demand, low interest rates and too-close-for-comfort regulatory
scrutiny, are simply common to banking. JPMorgan is in great shape
financially and is the best of the big banks.
13. McDonald's (symbol
).On one hand, first-quarter sales at restaurants open for at least
a year declined in all three of McDonald's geographic segments (the
U.S., Europe and the rest of the world). And McDonald's shares
trade for an above-market price-earnings ratio of 17. On the other
hand, the world's largest restaurant chain (by sales) has boosted
its dividend in each of the past 37 years.
14. Merck (symbol
). The drug giant is having a tough year, as it is still absorbing
the impact of the loss of patent protection last year for its
asthma drug, Singulair. The company's pipeline of new drugs isn't
as promising as that of rival Pfizer. But Merck's shares are worth
holding onto for income and for their turnaround potential.
15. Procter & Gamble (symbol
). The maker of Crest toothpaste, Tide detergent, Gillette razors
and other household products lost market share in recent years as
strapped consumers shifted to cheaper brands. Sales in emerging
nations haven't been strong enough to pick up the slack. But this
steady Eddie has raised its payout in each of the past 57
16. Verizon Communications. (symbol
) Verizon Wireless, the nation's largest provider of mobile-phone
service, has been steadily winning market share in recent years
(Verizon owns 55% of Verizon Wireless). And its investments in
building high-speed, high-capacity fiber-optic lines (called FiOS)
to homes and businesses should pay off for years to come. Verizon
is a great company, but its shares are pricey.
17. Wal-Mart Stores (symbol
). The world's largest retailer, Wal-Mart is a great company in a
highly competitive industry. The firm is cutting prices in the U.S.
in a bid to take market share from other discounters, and it plans
to open about 500 Neighborhood Market grocery stores over the next
four years. But Wal-Mart is struggling to succeed outside the
18. Walt Disney (symbol
).The entertainment giant is on a roll. In the January-March
quarter, sales and profits were up in every one of its
segments--with more visitors to its theme parks, more viewers for
its blockbuster movies, and higher results for its TV
channels--compared with the same period in 2012. But with the stock
up almost 40% over the past year, buying now would be buying
2 to sell
1. Alcoa (symbol
). Shares of the largest U.S. aluminum producer have shed 82% from
their all-time high of $47 in 2007, tracking a broader decline in
aluminum prices. Although a big jump in economic activity could
breathe some life into this stock, we think it's unlikely the
economy will jump as much as needed. Moody's recently lowered
Alcoa's credit rating to junk status in anticipation of continued
weak aluminum prices.
2. Hewlett-Packard (symbol
). Some investors worry that computer and printer maker HP could
fall victim to the "death of the personal computer," as consumers
embrace mobile devices. They may be right, as management has yet to
demonstrate that it has a strategy for avoiding such a fate.
Missteps recently caused a $9 billion loss on a bad acquisition.
And after gaining 72% this year, the stock isn't cheap.
The Dow's funky math
When the Dow debuted in 1896, Charles Dow, the co-founder of the
Wall Street Journal,
handpicked the index's constituents. He didn't have access to data
such as market capitalization (a stock's price times shares
outstanding), which benchmarks such as Standard & Poor's
500-stock index use to weight holdings. So Dow weighted his by
share price, meaning the index would act like a portfolio
consisting of one share of each company.
Call it tradition or call it anachronism, but not much has
changed since 1896. Stocks are chosen for selection and deletion by
a committee made up of staffers at the
Wall Street Journal
and S&P Dow Jones Indices. And components are still weighted by
price. The latter requirement has important implications: Apple,
Google and any other stock with an astronomical price are not
likely candidates for inclusion anytime soon unless they split
What might be next to enter or leave the Dow? Richard Moroney,
editor of the
Dow Theory Forecasts
newsletter, believes Alcoa could be booted off. "It's a tiny part
of the Dow because of its low share price," he says. And aluminum
is no longer an important enough part of the economy to truly merit
a dedicated spot. Moroney sees Wells Fargo (symbol
) and Comcast (
) as possible substitutes. Although the Dow contains two big banks,
financial firms are still underrepresented compared with their
influence in the S&P 500. As for Comcast, Moroney says, "TV is
what America does."