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All Contents © 2017The Kiplinger Washington Editors
By Luce Emerson
| August 2017
The Dow Jones Industrial Average is making history on a near-daily basis, setting new highs and, just last week, clearing 22,000 for the first time. Momentum is strong, investor confidence in Dow stocks is high and the average’s ascent shows no real sign of trouble.
The Dow Jones’ tech-sector holdings have been the main driver, which is no surprise considering technology stocks have also powered the all-time highs in the S&P 500 and Nasdaq Composite, too. Apple Inc. (AAPL) in particular earned credit for the final push over the 22k milestone, as its shares rocketed higher last Wednesday following a stellar fiscal Q3 earnings report.
The question now: Which of the price-weighted index’s holdings will push the Dow Jones over the next hurdle? I have my eyes fixed on the 25,000 mark, and my bets are on cyclically strong and in-favor stocks across financials and tech, among a couple other sectors.
In no particular order, here are seven Dow Jones stocks that will push the average to 25,000.
Prices and data are from the original InvestorPlace story published on August 4, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Lots of bullish news has Apple Inc. (AAPL) up 35% year-to-date and leading the Dow higher.
Most recently, fourth-quarter guidance of revenues between $49 billion and $52 billion was well-received by the market, allaying concerns over the delays in iPhone 8. China continues to be a sore point, but with the strength of Services and hardware sales, investors were busy applauding the success of Apple Pay and the App Store to worry much over the mainland.
Wearables are undergoing substantial growth as well. Lumped with Beats headphones and Apple TV in Other Products, sales for the category were up 23% for the quarter. It’s an area with huge growth potential and a focus of mine as I’m keen to see if that potential is able to be monetized effectively.
CEO Tim Cook still hasn’t released actual sales figures for the Apple Watch, but the growth is there. Sales were up 50% in the June quarter, and according to Cook, “it’s the number one selling smartwatch in the world by a very wide margin.” The skew to health & fitness is where I see the growth. This is still the early stages of realizing the full functionality of the watch, and sizable growth is still ahead.
The second quarter showed just how strong JPMorgan Chase & Co. (JPM) is both as a company and as a financial institution. Record net income, core loan growth in the high single digits, and great returns on capital that are passed onto shareholders.
The Corporate & Investment Bank swung to positive net income of $2.7 billion after a loss last quarter. Investment banking and treasury services revenue as well as fixed income markets were the primary drivers in getting back into the black.
Consumer & Community Banking brought in revenues of $11.4 billion compared to $442 million last quarter and a loss of $26 million for the same period last year. It’s almost underwhelming to say that the division is growing by leaps and bounds. Growth is just off the charts and ROE is back up to 17%. Commercial Banking too recorded record net income as did Wealth Management.
JPM currently trades at $94 per share. It’s easily worth $100, and I’d argue much more than that.
Big Macs continue to fly off the grill.
In the most recent quarter ending in June, McDonald’s Corporation (MCD) generated global comparable-store sales growth of 6.6% — its strongest growth number in more than five years. Overall company-side sales increased 8% on a constant currency basis. This was driven by comps growth and restaurant expansion.
Domestically — though the economy is muddling along with positive but low-single-digit GDP growth — MCD grew operating income by 5% and comp sales growth by 3.9%.
McDonald’s has the brand, the momentum and the execution prowess. And MCD — which Wall Street loves to claim is doomed every few years — is up 25% year-to-date without any signs of slowing down.
And while MCD stock trades at a premium to its peers, I’d argue that the forward price-to-earnings ratio of 22 is warranted given its global dominance and ability to localize. Growth is coming from both U.S. and non-U.S. markets, and McDonald’s savvy as it applies to the global consumer is unrivaled.
Microsoft Corporation (MSFT) is now all about empowering people — its customers, its employees, everyone. This is part of its new marketing angle to help the public understand the company’s relevance to the modern day business and average user. With a $4.5 trillion digital transformation total addressable market, Microsoft is looking to continue its evolution from PC/Windows to democratizing the data center to this bolder, grander space to conquer.
Office, Microsoft’s bread ‘n’ butter, shows a marked increase in subscribers. Home and Personal revenues from Office 365 and Office consumer product license revenue have risen year-over-year. MSFT projects that this upward trajectory will continue through next year, boding well for shareholders who have believed in Microsoft all along.
Customer long-term value is increasing as MSFT curates a suite of products and services that cater to the modern business and personal user. Linkedin, Skype, and Xbox all serve to increase stickiness, and above it all, Azure in the cloud to facilitate access from any location.
This powerful productivity portfolio will be a key driver of Microsoft’s top line. It’s already helping to drive market-beating returns in MSFT stock, which has climbed 17% year-to-date — not including its 2% dividends.
Procter & Gamble Co. (PG) now has activist investor (though he likes to think of himself as a constructivist investor) Nelson Peltz breathing down its neck. Changes are afoot, as management knows that it has been carrying around a burdensome portfolio of products that hasn’t been successful in driving meaningful growth.
The plan is to continue to shave down the number of brands and come to a core group of consumer products. P&G intends to set a new standard for itself and for the industry. A more focused portfolio with significant brand equity will result in increased efficiency (on costs, in particular). These savings can then be recycled back into investment in R&D and leveraging brand strength across the world.
So far this year, Procter & Gamble’s performance is OK, at 8%, though that’s actually trailing the Dow Jones’ performance of 12%. Still, expect PG stock to propel overall index performance as efficiencies materialize. The underlying brand value is not to be overlooked; that, and a sophisticated global supply chain, point to a best-in-class company. And the 3% dividend doesn’t hurt.
In the world of franchise films, Walt Disney Co. (DIS) is simply crushing it. Rogue One was a huge hit last year, and as of May of this year, the studio had already crossed the $3 billion mark in global box offices.
Pirates of the Caribbean: Dead Men Tell No Tales, the redux of Beauty and the Beast (the highest grossing film of the year as of May) and Guardians of the Galaxy Vol. 2 have led Disney to a strong summer — a period when other studios have not had the same kind of success. Marvel has been a veritable gold mine. Spider-Man: Homecoming has been released, and as we look ahead, Disney still has Thor: Ragnarok andStar Wars: The Last Jedi coming up later this year.
The live-action remakes have served DIS well at the box office, an evidenced by Beauty and the Beast this year. Success in kind with Alice in Wonderland, Maleficient and Cinderella, have paved the way and allowed DIS to hone this money-making formula.
All the box-office successes are helping to counter the drag than ESPN has created — drag that has been plenty baked into shares at this point. Expect DIS to recover and help lift the Dow in the coming months.
Goldman Sachs Group Inc. (GS) CEO Lloyd Blankfein has recovered magnificently from his lymphoma diagnosis last year, and he is focused more than ever on reversing Goldman’s underperformance.
Low volatility has weighed heavily on trading revenues for the Wall Street investment bank, which will continue to bleed into the current quarter’s performance. But Blankfein reassured analysts that GS is changing — that it’s not a stodgy traditional bank, but one that can change with the times.
Having led Goldman through the 2008 financial crisis in reasonably good form, Blankfein has given us ample reason to be confident in his abilities. For one, he highlighted the fixed-income business, which has suffered in an environment when clients have been less active on the trading front. Commodities, often cyclical, have also served to hurt performance.
But GS is addressing the problem areas. There’s no reason why it should trade at a depressed multiple after the problems are worked through.
This article is from Luce Emerson of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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