7 stocks that will take the DJIA to 15,000
The price-weighted blue-chip index could climb there with the help of just a few components.
By Jon Ogg
The Dow Jones Industrial Average ($INDU) closed Tuesday at an all-time high of 14,253.77. Our original price target for the DJIA for 2013 was 14,590 -- based on our own analysis and methodology. We now expect the index to surpass our target, even if we have yet to officially raise it. The reality is that according to our calculations, it will be enough if the top seven of the 30 Dow stocks perform well this year for the blue-chip index to hit 15,000.
At issue is that the DJIA is a price-weighted index that does not take into account the market capitalization of its components. For example, the bottom seven DJIA stocks account for barely a 7% combined weighting. These stocks could all double in a static scenario (where the other stocks remain the same) and yet the index would barely get close to the 15,000 mark.
At the other end, the seven DJIA stocks that will drive the index higher account for 43% of the entire weighting of the 30 DJIA components. If these stocks move, the index moves with them.
For instance, General Electric (GE) has a $245 billion market cap, yet because of its $23.59 share price its weighing in the Dow is only 1.27%. On the other hand, 3M (MMM) has a 5.63% weighting because its share price is $104.45, and United Technologies (UTX) has a 4.9% weighting in the DJIA because its price is $89.13. Combined, these two companies have a market cap of $159 billion. While GE is worth almost 150% of their market cap, its weighting in the DJIA of 1.27% compares to the combined weighting of 10.73% of 3M and United Tech. The DJIA has been said to skew stock market performance, even if investors are usually referring to it as "the market."
International Business Machines (IBM), Chevron (CVX), 3M (MMM), McDonald's (MCD), United Technologies (UTX), Caterpillar (CAT) and Exxon Mobil (XOM) will likely be the seven stocks of the 30 DJIA components to lead the index to 15,000.
IndexArb.com calculated just how much these weightings matter. The second figure is the cumulative weighting:
1) IBM 11.13%; 11.13%
2) Chevron 6.35%; 17.48%
3) 3M 5.63%; 23.11%
4) McDonald's 5.16%; 28.27%
5) United Technologies 4.90%; 33.17%
6) Caterpillar 4.86%; 38.03%
7) Exxon Mobil 4.83%; 42.86%
International Business Machines is at $206.53, against a 52-week range of $181.85 to $211.79. The consensus target price is $225.75, implying an expected gain of 9.3%. IBM's dividend yield is 1.7%, but the dividend has been rising, and the company keeps buying back stock. Warren Buffett has bought a large stake that is likely to rise as well.
Chevron trades at $117.93, against a 52-week range of $95.73 to $118.53. Its consensus target price is $124.51, implying upside of 5.6%, and it has a 3.1% dividend yield. Imagine if oil demand is even a tad higher than expected in 2013, or if the forecasts for global oil demand go up in 2014 when the broader global economy is expected to be stronger. Chevron is likely to go to all-time highs, and it is expected to raise its dividend in the coming weeks.
3M is at $104.45, against a 52-week and all-time high of $104.81. Analysts have a price target of only $106.33, for a gain of close to 2% onlly. The problem is that analysts have been slow to lift their price targets here. However, 3M's dividend, which currently yields 2.4%, has been raised over and over and has much more room to grow. Analysts' highest price target is $125, so some are already much more bullish. If 3M hits $115, that is effectively a 10% gain.
McDonald's trades at $95.81, against a 52-week range of $83.31 to $100.44. MCD was the best DJIA stock of 2011 and the worst of 2012. The fast-food giant's consensus price target of $99.82 implies upside of just 4.2%, but there is a 3.2% dividend yield, and the old consensus price target back before the 2012 selloff was closer to $110. If McDonald's gets its growth back with its healthier choices and affordable meals, there is more than 10% upside at the Golden Arches again.
United Technologies trades at $89.13, against a 52-week range of $70.71 to $91.51. The consensus price target of $96.47 already implies 8.2% upside, and there is the 2.4% dividend yield as well. The highest analyst target is $105, and the analysts have not been aggressive in raising their targets yet. That implies 18% upside to the street's high target.
Caterpillar trades at $90.21 and has been dragged down by emerging market and China growth. The consensus price target is back up at $111 now, implying upside of 23%. There is also the dividend yield of 2.3% that has a lot of room to grow if the company wants, and we would point out that Caterpillar shares have already traded at $114.25 in the past year. This one does not even have to hit a new high for analysts to be right.
Exxon Mobil trades at $89.61, against a 52-week range of $77.13 to $93.67. Analysts have implied upside of 5.5% with the $94.51 price target, but there is a 2.5% dividend yield and its dividend is also expected to be raised in the coming weeks. If global oil demand forecasts are raised later this year for 2014 as the global economy is expected to recover, the street's high target price of $105 would be suddenly much more realistic, and that would bring gains of 17%, plus the higher dividend.
Since this is how the DJIA is calculated, the rest of the 23 DJIA components only have to remain relatively the same while these top seven components only have to live up to expectations. That gets you to right at Dow 15,000.
Here is something else to consider. These seven great stocks will not really perform in a vacuum. That being said, if the rest of the market performs well and the economy recovers as expected, then you could be looking at DJIA 16,000 at some point in 2014.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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