Top Dow stocks with room to run

Related topics: Exxon, Caterpillar, Chevron, Disney, stock market

With political unrest seething in the Middle East and oil prices climbing, Exxon Mobil (XOM, news) and Chevron (CVX, news) have been two of the strongest stocks in the Dow Jones Industrial Average ($INDU) this year. Both have gained about 14% this year.

I like these energy companies' stocks. Yet some of the other top performers in the Dow leave me cold, including Caterpillar (CAT, news), up 19% so far this year, and Boeing (BA, news), up 22%.

Here are my "buy," "hold" or "sell" rankings on the 10 stocks that were the Dow's leaders for the first four months of 2011:

Caterpillar: Sell. I dislike this stock for several reasons. As a major exporter, Caterpillar has benefited from a weakening dollar for most of the past nine years. I suspect that trend has played out.

The Peoria, Ill., company has debt amounting to more than twice stockholders' equity. And valuations are off-putting. Caterpillar shares fetch 5.9 times book value (corporate net worth per share) and 21 times the past four quarters' earnings. In my opinion, it's too late to buy.

Boeing: Sell. Boeing stock has been strong this year as airline traffic has picked up. Yet the Chicago company has had an embarrassing year. Its new 787 airliner is coming to market three years late, if there are no further delays. It was surprised by a hole that developed in the fuselage of a Southwest Airlines 737 jet last month. And the National Labor Relations Board criticized the company for possible "illegal retaliation" against union workers.

What bothers me more is that the company's debt is almost three times equity. And first-quarter revenue was $14.9 billion, the lowest first-quarter figure since 2006.

Exxon Mobil: Buy. Exxon is the largest U.S. oil company by market value. The Irving, Texas, company is also the most profitable among the 30 largest U.S. energy companies, measured by return on total capital.

Friends in the oil business tell me that Exxon, because of its operating prowess and financial muscle, generally gets its pick of the best drilling locations and the best petroleum geologists in the field. Even with its nice gain this year, the stock sells for 12 times earnings. That's modest compared with the multiple of 14 for the Dow or 15.5 for the Standard & Poor's 500 Index ($INX).

Chevron: Buy. The San Ramon, Calif., company is the second-largest U.S. energy company by market value. It has a strong balance sheet, with debt only 11% of stockholders' equity. There's not a lot of growth here, or at Exxon either, for that matter. Yet profitability is high: Chevron earned 19% on stockholders' equity last year.

Pfizer: Buy. Big pharmaceutical companies have barren pipelines, the conventional wisdom says. That doesn't square with the fact that Pfizer (PFE, news) has more than 100 drugs in clinical trials, including 25 in Phase 3, the most advanced phase. The New York company's stock sells for nine times earnings and has a dividend yield of 3.9%.

IBM: Hold. IBM's profitability is magnificent. Earnings for the Armonk, N.Y., company grew right through the recession, set a record last year and should break it this year. If I owned IBM (IBM, news) I would hold it, but I wouldn't deploy new money into it. One reason: The stock sells for nine times book value. I usually prefer a price/book multiple of two or less.

Walt Disney: Buy. In the past five years, Walt Disney (DIS, news) increased earnings at a 7% annual clip. Imagine what the Burbank, Calif., company could do in a good economy.

People are used to evaluating Disney based on how its theme parks are doing, but television these days is a bigger part of Disney's pie. It owns ABC Television Network, the Disney Channel and 80% of ESPN, among other media properties.

American Express: Buy. The New York company appears solid after hitting a recession-induced bump. American Express (AXP, news) stayed profitable during the recession, but at a reduced level. At $3.35 a share, earnings in 2010 missed the 2007 record by a penny. This year analysts expect $3.82.

DuPont: Sell. DuPont (DD, news), the chemical maker headquartered in Wilmington, Del., has a few flaws, in my view. The company is cyclical -- not a sin for a chemical manufacturer, yet a potential concern nevertheless. That's why I would prefer to buy the stock when it's cheap. It's not a bargain now. The shares trade at 16 times earnings and almost five times book value. In addition, DuPont's debt, which is a bit more than stockholders' equity, is higher than I like.

United Technologies: Sell. Each of the Hartford, Conn., company's three biggest units -- Pratt & Whitney aircraft engines, Otis elevators and Carrier air conditioners -- showed modest revenue declines from 2008 through 2010. Yet the stock sells for 17 times earnings. I like United Technologies (UTX, news) but regard the stock as untimely now.

John Dorfman is the chairman of Thunderstorm Capital and a columnist for Bloomberg News. At the time of publication, he owned shares of Pfizer.