If you simply looked at the averages after this huge romp, you'd be intimidated by the prices, blown out by the ranges and mystified that so many stocks can go up so high in one year, particularly during a year when interest rates on Treasuries at last started going higher again.
So when tasked to make predictions for where the Dow Jones Industrial Average ($INDU +0.39%) might finish next year, I initially struggled to see how the standard could go higher. Then, once again, as I have for so many years, I looked at the individual pieces of the Dow -- and I see, once again, upside.
Now, it can't be upside like I saw last year, and that's in part because we are not coming into the year hobbled and bruised like we were ahead of 2012. Back then, the fiscal-cliff drama and the higher tax discussion caused many to sell and to leave substantial profits on the table.
But we have something going on that we didn't have last year at this time: a genuine expansion courtesy of pent-up demand, a shrewdly managed Federal Reserve and rates that are still low enough to propagate growth. In addition, we have something brand new and astoundingly positive -- an atmosphere in Washington that's not as poisonous. That's because the insurgents in the Republican Party have been thrown back in favor of a compromise and a belief that, if the Republicans just shut up, they will sweep in November because of the disaster that is Obamacare.
While I am willing to engage in Washingtonian prattle simply to attract those who have become convinced that the government is all-powerful when it comes to stocks, I think 2014 will be a different kind of year -- one when Washington recedes and profits take center stage. I have done thousands of pieces here and on television, so it was rather surprising to me that a recent episode of "Mad Money" was perhaps the most commented one in a very long time. In it I discussed the idea that we are in a true bull market in which profits are the most important determinant of share price, and the episode included a piece in which I tried to express my jealousy of the market's affection for Twitter (TWTR +8.40%).
That, again, is part and parcel with the notion that people have forgotten what really impacts stocks, which is how the companies themselves are doing. I have devoted a substantial chapter of my new book, Get Rich Carefully, to how stock-picking is going to make a comeback. It won't be market-picking, with its high water-mark risk-on/risk off nonsense -- and it won't be ETF-picking, as that sainted method of investing seems to have reached a peak, too.
It's not stock-picking in a vacuum. That would be wrong. The world view that you need trace out before you pick a stock is incredibly important, and if you have the wrong one you will either make less or lose money, regardless of the stock. Still, though, next year is an "every tub on its own bottom" year, and we have to judge stocks with that in mind.
So without further ado, here's how I see the stocks in the Dow Jones Industrial Average faring in 2014.
1. American Express (AXP +0.43%). We own it for Action Alerts PLUS, and I have to tell you that I find it overvalued. But, because of its hybrid credit-card and interest-rate model and its play on small business, it is loved to death. That's how a company with $5 in earnings power is trading almost at $90. I don't see a lot of leverage to the earnings at this juncture unless we see a true global expansion at AmEx that includes more business formation and travel. But stranger things have happened, and this is what the stock is saying will happen.
Can AmEx get to $100? I think that the average multiple for stock next year will gravitate toward 17x as the economy expands with little inflation, and that makes American Express a $100 stock -- nowhere near the 50 percent-odd gain, but certainly nothing to sneeze at. This is a company that is benefitting from being knocked down to shocking levels because of its near-death bad lending at the depths of the recession. It has been recovering ever since. It also seems, perennially, to have accumulated more and more fat. However, I believe it is a company that has uniquely used technology to cut costs rather dramatically.
2. AT&T (T +0.75%). If this company does nothing, the stock still could go higher because of general improvement in business conditions. But the under-5 percent share rise, even when you include the dividend, wasn't enough to write home about vs. Verizon (VZ +0.82%). I continue to not be a fan, especially because an outfit like Verizon is not sitting still, and is paying up huge to own all of its lucrative wireless business. Verizon's got such momentum, and AT&T has virtually none. I think we'll see another tangential dividend boost and a slight uptick in earnings and a $36 stock, unless AT&T starts buying things overseas, where the growth is better. That would take more vision than this management team has right now, though.
3. Boeing (BA +0.32%). This company is going to have another big year. I know, that seems pretty impossible after it put in the best performance of all of the Dow stocks, having gained about 80 percent. But this company is really only in year two of a new plane cycle, and the time it takes to make these aircraft will be much reduced, and the part costs will come down, too.
That means you are going to see earnings leverage galore. The Dreamliner model is now looking like a smashing success, and that's pretty amazing when you think about what people were saying about it just last year. One of my favorite business moments of 2013 was when CEO Jim McNerney came on "Mad Money" in the late summer and said he never doubted for a moment that the plane wouldn't be a success, since the fire issue was strictly an engineering question and could always be resolved by the incredible engineers at Boeing.
This company will also benefit from the restoration of the defense budget to higher levels, as the sequester had taken some of the upside away. The airline business has never been this healthy. The globe's airline companies are doing better and better, and airport expansion in China is unprecedented and doesn't have nearly enough planes to do the job. This is Boeing's time, and the average cycle for a new aircraft's profits before peaking is seven years -- five years away from now.
4. Caterpillar (CAT +1.06%). You want controversy? Stephanie Link and I think this is Caterpillar's year. One of the few unchanged stocks in the Dow for the year, this name is coming in with the lowest expectations I can ever recall. CEO Doug Oberhleman is the key to this situation because, if he leaves or is pushed out, you have a $100 stock that same day, unless it is already north of $100. That's not inconceivable if you believe, as I do, that we are about to have an economic expansion in this country that will require a huge amount of earth-movers and engines.
Plus, I like that the write-offs from the failed Chinese mining company buy are behind Caterpillar, and people have given up on the beleaguered mineral complex, a key customer. If China hangs in at all and if Europe continues to stabilize, I think Caterpillar will restructure and deliver on the fourth quarter of next year, and that's how the stock will go to $110.
5. Chevron (CVX +0.58%). This stock been stuck in neutral, having picked up less than 15 percent this year, even as the company has seen good growth and has enjoyed excellent replenishment rates. But Chevron's become neither here nor there. We have a ton of companies with a 3 percent-plus dividend yield, so that's not attractive. Many companies have much clearer, faster growth paths in the industry, including favorites of mine, like Noble (NBL +0.44%) and EOG (EOG +0.38%). We have the shadow of Warren Buffett casted on Chevron, much as the halo of Oracle (ORCL +1.06%) plays out on Exxon (XOM +0.72%). Plus I don't think it is a candidate to bring out value like Marathon Oil (MRO +0.20%) and ConocoPhillips (COP +0.53%) and perhaps Occidental (OXY +0.27%) and Hess (HES +1.15%) might do. A neither-here-nor-there stock means that, without a big run in oil -- which I do not expect, although I don't anticipate it plummeting from these levels either -- I don't see how Chevron can go up more than $5 or $6. A dud.
6. Cisco (CSCO +0.56%). I still can't believe this stock has been able to finish in the black this year. Here's a company that has reported progressively weak numbers, quarter after quarter, and I see no end for it in sight. Anyone prognosticating on Cisco knows all bets are off if the board decides to force the retirement of CEO John Chambers. But I think the board is enamored with this self-confident man who has all of the answers, has badly bought back billions of dollars of stock and has seen Cisco fall behind old nemeses Alcatel (ALU -1.85%) andJuniper (JNPR +0.60%) in so many areas.
It wasn't supposed to be like this. Cisco fancies itself to be part of the Internet of Things, a company uniquely intertwined with the incredible growth of voice, data and video. If that's the case, and if there is a huge secular window to the positive, how is this company underperforming so badly? All that said, I have to believe that, by this time next year, the comparisons will at least be easy. I see the stock going back to $24, where it was before the most recent shortfall. Don't wait around for it, though, as I think the move will be a distinctly late-third-quarter affair.
7. Coca-Cola (KO +0.07%). This company is going to do something big this year. It has to. Both diet and regular carbonated soft drinks are declining at a pace that is alarming and shocking. We could be seeing the beginning of the tobacco-izing of this industry, and that doesn't lend itself to Coca-Cola's 20x multiple. The sub-3 percent dividend yield doesn't do much for me, either. But a big restructuring, coupled with a change in management and a possible acquisition to get it less dependent on carbonated drinks, sure would help. This is a very challenged company and, again, if Warren Buffett were to let some go, it could easily trade to $35. With restructuring, I am expecting I think we could see the stock reach $45. It's ironic -- what is saving Pepsico (PEP +0.22%) from a similar debacle is its Frito Lay division. It, too, is struggling with carbonated soft drinks, but snacks remains a very viable growth business.
8. Disney (DIS +0.78%). When Disney reported last, there was almost universal opprobrium for the company. It drove me crazy, because I thought it was a darned good quarter with excellent ESPN numbers -- the key metric -- as well as decent box office and excellent theme parks. Since then things have only gotten better as gasoline has gone down allowing the consumer to vacation more and as ESPN rates have held steady to higher.
But here is the real kicker for this company: With a stock that has rallied almost 50 opprobrium, the Star Wars franchise is now on the horizon. Not only do I expect even fewer non-traditional Marvel/Disney movies, but I think the hype over the new Star Wars movie will be rife at this time next year. Companies like Disney are going to get much higher price-to-earnings ratios as we see that earnings aren't going down when rates go higher. As a result, I can see this stock going to $83 without much trouble, meaning a 20x multiple on next year's probable earnings.
9. DuPont (DD +1.74%). This year we are going to see what a non-commoditized DuPont is made of, and I bet it is made of some pretty darned good numbers. When Ellen Kullman broke the news that she would be spinning out the company's Ti02 division, I was thrilled. Because, next to uncoated free sheet paper, fertilizer and corrugated container board, not much offers less added value than a chemical whitener company. Without this division, we should see immediate multiple expansion at DuPont, and I think the new company could earn $4 per share. That would send Dupont's stock to $80.
I believe DuPont will be one of the best-performing stocks in the index. This new DuPont is loaded with fast-growing specialty chemicals and biotech-bred agricultural products. Plus, Kullman's committed to the dividend. The stock has risen nicely since the announcement, but I think there'll be much more to be had when the spinoff is consummated.
10. Exxon Mobil. This will be the year when Exxon will get to have a multiple that might even be at a premium to the average stock in the S&P. That means it could trade to $128, and it will be one of the best performers in the Dow. Such is the power of Warren Buffett, that he can convey higher-multiple status on a company that has slow-growing but consistent earnings and the kind of monster share buyback that he so covets.
I think that Exxon, after multiple years -- not quarters, but years -- of being just kind of an oil bank with very little production growth and replacement activity, is now seeing paydirt on its myriad projects and is going to grow consistently in a fashion that will make the other major oil companies jealous. This is Exxon's time, and it is now a very easy stock to own. So it will be bid up exorbitantly, as all darlings are.
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