Jan. 12, 2012 at 7:05 AM ET
By Jon C. Ogg, 24/7 Wall St.
Another year has come and gone, and that means it’s time for the 24/7 Wall St.’s New Year’s market projections. The Dow Jones Industrial Average managed to gain about 5.5 percent in 2011, but the S&P 500 fell 0.04 points. The markets are starting 2012 with some negative economic trends, including slowdowns in China and India and Europe on the verge of crisis. Given this picture, does it seem realistic to expect a double digit gain from the Dow in 2012?
In fact, 24/7 Wall St. projects that the Dow could rise almost 12 percent, peaking around 13,678, in 2012. It seems almost too good to be true, but is actually feasible when you look at the big picture. We have used the same methodology to come up with a peak valuation for the DJIA for three years in a row. Amazingly, the peak values were almost within 1 percent of the actual levels in 2011 and in 2010.
In order to identify the best and worst stocks in the Dow for 2012, we reviewed the DJIA stocks which had the most and least implied upside. Not surprisingly, the ones with the most upside potential in 2012 were among the worst performing in 2011. Similarly, the least attractive DJIA stocks are in many cases stocks which are now trading close to new highs. After looking at Thomson Reuters data, there are several stocks which may significantly outperform the market this year and several that will be disappointments.
These are the best and worst stocks in the Dow for 2012.
Alcoa, Inc. closed 2011 at $8.65, leaving an implied gain of 44.2 percent to the $12.48 consensus price target. Alcoa’s game is simple and the company believes that the aluminum market can double by 2020. Shares were brutalized last year as the 52-week range was $8.45 to $18.47. It’s hard to imagine that this stock traded above $30 before the recession.
Bank of America Corporation
Bank of America Corporation, of course, has the most upside because it was the worst-performing DJIA stock of 2011, losing more than half of its value. At $5.56, it has an implied upside of an incredible 72.3 percent to the $9.58 target. This may sound too good to be true, notwithstanding Warren Buffett’s faith. BofA’s problems are almost too numerous to bother naming here.
Caterpillar, Inc. is heavily dependent on emerging markets for mining and infrastructure, so its business is highly cyclical. The 2011 close at $90.60 was near the middle of the 52-week range of $67.54 to $116.55. The consensus Thomson Reuters price target of $114.50 implies an upside of 26.3 percent and the dividend is about 2 percent. As go the emerging economies, goes Cat!
J.P. Morgan Chase & Co.
J.P. Morgan Chase & Co. has a strong management team, but it’s in the battered banking sector. It now trades well under book value. If the sector improves, investors will probably seek opportunity with Jamie Dimon. At $33.25, there is an implied upside of 39.3 percent to the $46.33 price target from Thomson Reuters. Keep in mind that the 52-week trading range is $27.85 to $48.36, so even the leader has lost a third of its value.
United Technologies Corporation
United Technologies Corporation was a surprising inclusion on the list as the conglomerate was shown to have 21.5 percent upside from the current $73.09 price to a target of $88.79. That would still not top the high last year, when the range was $66.87 to $91.83.
Home Depot, Inc.
Home Depot, Inc. might seem like a no-brainer for limited upside when you consider the poor state of the housing market. Amazingly, this one was a major performer by the end of 2011, and was up a massive 50 percent from its 52-week low. It’s as if the market is trying to signal a major resurgence of home improvement ahead. At $42.04, the implied upside is only 1.2 percent if the stock just hits the consensus price target of $42.55. Imagine if the company starts giving really good news again.
McDonald’s Corporation was the top DJIA performer in 2011, so it should be no shock at all that analysts see little potential for the stock this year. At $100.33, the consensus upside is only about 3.1 percent to the target of $103.48. MCD hit hit new all-time highs at the end of 2011 and media and market pundits expect continued strength. If so, analysts will have to raise their price targets. It already yields close to 3 percent in dividends and its payout was recently raised.
The Travelers Companies, Inc.
The Travelers Companies, Inc. has been an anomaly for investors. While banks and many financial stocks were in the gutter for 2011, it ended the year close to a multi-year high. At $59.17, the Thomson Reuters consensus price target of $61.37 leaves only 3.7 percent implied upside and the 52-week trading range is $45.97 to $64.17. It does have a 2.8 percent yield. This is often considered the least visible of the 30 DJIA stocks, so maybe there is more to this story than the analysts think.
Verizon Communications, Inc.
Verizon Communications, Inc. was the only one of the 30 DJIA stocks to end above its consensus price target. Shares closed at $40.12, about 2.5 percent above the Thomson Reuters target of $39.14. Still, the telecom giant has a massive 5 percent dividend yield and its shares just hit a 52-week at the end of last week.
Wal-Mart Stores, Inc.
Wal-Mart Stores, Inc. has the least implied upside to its consensus price target from Thomson Reuters of $61.70 because its stock has been close to new multi-year highs. At $59.76, that leaves only about 3.2 percent implied upside, but it has a 2.4 percent dividend that should be raised very soon and its 52-week trading range is $48.31 to $60.00. While it has a low dividend, this is actually a really high yield compared to most retail stocks. It will not be surprising if analysts start to see more upside by raising their price targets.