12 Dow Stocks to Hold, 2 to Sell
After representing the U.S.
After representing the U.S. stock market for more than a century, the Dow Jones industrial average isn't going away. Perhaps it should. Despite the occasional injection of new blood (Cisco Systems and Travelers replaced General Motors and Citigroup, respectively, this year), the 30 Dow stocks still contain too many remnants from a bygone industrialized economy. Still, its member companies are influential and widely held. But we rate 12 Dow stocks as "hold" and two as "sell." (Prices are as of September 24. Click on the stock symbols for updated prices.) The slide show navigation begins to the right.
AMERICAN EXPRESS
Symbol: AXPPrice (as of September 24): $33.85Rating: Hold The credit-card issuer is in relatively good financial shape compared with other financial firms. But job losses, chastened consumers and new federal regulations all pose big obstacles to growth. In addition, the shares have tripled in value since March, leaving them well beyond bargain territory.
BANK OF AMERICA
Symbol: BACPrice: $16.98Rating: Sell Yes, BofA posted a second-quarter profit of $3.2 billion, helped by one-time gains from asset sales and government guarantees that allow it to borrow cheaply. But not enough has been done to purge its balance sheet of the problem loans, which are an ongoing threat to profits. Until they're gone, avoid the shares.
BOEING
Symbol: BAPrice: $51.79Rating: Hold Whoever named Boeing's next big plane the Dreamliner either had a great sense of irony or had no clue. The 787 has been plagued by delays, cancellations and cost overruns. Still, the company has a backlog of orders for 850 planes. Boeing's defense business -- half of revenues -- remains strong, and second-quarter earnings were up 22% from a year earlier.
CATERPILLAR
Symbol: CATPrice: $51.85Rating: Sell The heavy-equipment maker needs a strong global economic recovery to be back on top. For now, Caterpillar is battening down the hatches -- laying off workers and streamlining operations -- to keep its strong cash flow from flagging. This year it posted its first quarterly loss since 1992. Caterpillar is a first-class company that will roar back -- eventually.
CISCO SYSTEMS
Symbol: CSCOPrice: $22.65Rating: Hold The computer-networking king sits atop a mountain of cash ($34 billion), and it reigns in the markets for routing and switching equipment. Revenues should start expanding again next year, but the stock, at 17 times year-ahead earnings estimates, isn't cheap. Look for Cisco, a serial acquirer, to go shopping again to bolster growth.
DUPONT
Symbol: DDPrice: $32.27Rating: Hold This chemical maker is deep in the throes of a cost-cutting effort that should position it well for an economic recovery. But that recovery appears to be already built into the share price, which has risen 37% since early July. In addition, the company may be tempted to trim its rich, $1.64 dividend (the stock yields 5%) if things get worse before they get better.
GENERAL ELECTRIC
Symbol: GEPrice: $16.58Rating: Hold Infrastructure and clean energy provide an enormous opportunity for GE, which has interests in everything from wind-powered turbines to water-treatment systems. But we are uneasy about its financing arm, which accounted for 39% of operating profits last year. It suffers from the same bad-loan problems that plague banks.
HOME DEPOT
Symbol: HDPrice: $27.04Rating: Hold It's hard to imagine a worse retailing niche in a housing crisis than a home-improvement chain. Not surprisingly, sales in the first fiscal quarter fell by 10% from the year-earlier period. But management is trimming overhead and capital spending and keeping inventory lean. Earnings should bottom this year -- at $1.40 per share, about half the 2006 number -- and rise modestly next.
INTEL
Symbol: INTCPrice: $19.54Rating: Hold The world's largest semiconductor company dominates the microprocessor business, which is starting to benefit from inventory replenishment in the computer industry following a prolonged slump. Intel has a strong balance sheet and pays a nice dividend (56 cents a year) for a tech company, but the shares, at 34 times estimated '09 earnings, are not cheap.
KRAFT
Symbol: KFTPrice: $26.38Rating: Hold Earnings should hold steady in 2009 -- no mean feat given rising commodity costs and currency swings. Moreover, consumers are trading down from Kraft's high-priced brands, such as Oreo, to store brands. The 4% dividend yield helps, but until growth revs up again, we'd approach the stock with caution.
MERCK
Symbol: MRKPrice: $31.01Rating: Hold For a company that spends a lush 20% of sales on R&D, its labs have seemed unproductive. Perhaps the pending $41-billion acquisition of Schering-Plough will help, or maybe Merck's lab will pull a rabbit out of the hat. Otherwise, the stock's primary attraction is the 5.1% yield (although Merck hasn't boosted the payout in five years).
PROCTER & GAMBLE
Symbol: PGPrice: $57.84Rating: Hold Given its immensity -- the world's biggest consumer-products company generates annual revenues of about $80 billion -- P&G's growth rate has been impressive. Sales have climbed 9% annualized over the past five years, and earnings, 11.5%. But growth will stall in the fiscal year ending next June, with sales flat and profits down slightly. Longer term, the stock, which yields 3.1%, is a safe, if unexciting, bet.
TRAVELERS
Symbol: TRVPrice: $47.52Rating: Hold To its credit, the property-and-casualty insurer has mostly stayed out of the headlines, not easy for a company in the accident-prone financial-services industry. The company is generating 1% to 3% in additional insurance premiums each year. Growth is sluggish, but the stock, which trades at a discount to book value, is modestly priced and yields 2.6%.
Symbol: VZPrice: $30.15Rating: Hold Like AT&T, Verizon is offsetting a declining land-line business with an expanding wireless business. Although Verizon's wireless network is superior to AT&T's by some measures, the company must share 45% of its wireless profits with the unit's co-owner, Vodafone. In addition, Verizon carries a much higher debt load than AT&T.
