DJIA 2010: Best Targets Imply 11,455 (BAC, CVX, CSCO, GE, HPQ, INTC, JPM, KFT, PFE, PG, TRV, WMT, XOM, AA, BA, DIA)

We have started taking a look at the 30 stocks comprising the Dow Jones Industrial Average to see which stocks had the most implied upside of all DJIA components.  We have taken a snapshot of the “mean price target” of each of the 30 DJIA components based upon Thomson Reuters consensus price targets for a year out.  This list is expanded beyond just the ten with the most upside because there were more than 10 components with expected double-digit returns and because the list was also dominated by financial and energy stocks.  The list of double-digit performance expectations is as follows: Bank of America Corporation (NYSE: BAC), Chevron Corp. (NYSE: CVX), Cisco Corporation (NASDAQ: CSCO), General Electric Co. (NYSE: GE), Hewlett-Packard Co. (NYSE: HPQ), Intel Corporation (NASDAQ: INTC), JPMorgan Chase & Co. (NYSE: JPM), Kraft Foods Inc. (NYSE: KFT), Pfizer Inc. (NYSE: PFE), Procter & Gamble Co. (NYSE: PG), The Travelers Companies, Inc. (NYSE: TRV), Wal-Mart Stores Inc. (NYSE: WMT), and Exxon Mobil Corp. (NYSE: XOM).

As you will sadly see, Alcoa, Inc. (NYSE: AA) and Boeing Co. (NYSE: BA) shares imply more downside than upside as those two stocks are the only DJIA components already trading above their implied one-year consensus mean price targets.  We first looked at the Warren Buffett stocks last week with the most implied upside and decided to run the calculation on the 30 DJIA components for this week.  The implied results show each ticker, the closing price for 2009, the mean price target from Thomson Reuters, the expected percentage price gain derived by the change in Friday’s price to the mean target, and we even included the 52-week trading range of each component.  The results are as follows:

Ticker   Price   Target    Exp.Gain  52 Wk Range
AA    $16.12    $16.02    -0.6%     4.97 – 16.51
AXP   $40.52    $40.68    0.4%     9.71 – 42.25
BA      $54.13    $52.76    -2.5%     29.05 – 56.56
BAC    $15.06    $21.11    40%     2.53 – 19.10
CAT    $56.99    $61.81    8.4%     21.71 – 61.28
CVX    $76.99    $85.80    11.4%     56.12 – 79.82
CSCO   $23.94    $27.18    13.5%     13.61 – 24.83
DD      $33.67    $35.17    4.4%     16.05 – 35.62
DIS     $32.25    $32.61    1.1%     15.14 – 32.75
GE      $15.13    $17.33    14.5%     5.87 – 17.52
HD     $28.93    $30.66    5.9%     17.49 – 29.44
HPQ   $51.51    $59.21    14.9%     25.39 – 52.95
IBM   $130.90    $136.05    3.9%     81.76 – 132.85
INTC  $20.40    $24.04    17.8%     12.05 – 21.27
JNJ     $64.41    $66.80    3.7%     46.25 – 65.41
JPM    $41.67    $53.53    28.4%     14.96 – 47.47
KFT     $27.18    $31.90    17.3%     20.81 – 29.84
KO       $57.00    $62.38    9.4%     37.44 – 59.45
MCD    $62.44    $67.71    8.4%     50.44 – 64.75
MMM  $82.67    $90.53    9.5%     40.87 – 84.32
MRK    $36.54    $39.28    7.5%     20.05 – 38.42
MSFT  $30.48    $32.75    7.44%     14.87 – 31.50
PFE     $18.19    $20.37    12%     11.62 – 18.99
PG      $60.63    $67.19    10.8%     43.93 – 63.48
T          $28.03    $29.96    6.8%     21.44 – 29.46
TRV    $49.86    $56.82    13.9%     33.07 – 54.47
UTX    $69.41    $76.06    9.5%     37.40 – 70.89
VZ        $33.13    $34.23    3.6%     26.10 – 34.76
WMT    $53.45    $60.09    12.4%     46.25 – 57.51
XOM    $68.19    $79.29    16.2%     61.86 – 82.73

We ran an average of the “mean price targets” to get an implied consensus upside for the DJIA in 2010.  If we average out all of the components, then we end up with an average consensus expected gain of 10.3% for 2010.  But then if we eliminate the two expected negative return components and remove the two major banks with an expected gain of 28% and 40% then our expected average gain per component is 9.4%.

We wanted to assign this for a fixed price on the DJIA for 2010, but there is just one problem here.  The DJIA is a price-weighted index that cares not about market capitalization.  The only matter is the share price of each stock, and almost all DJIA components pay a regular dividend and a stock split or a further index component change will change all of the component weightings. So to be fair, we have taken an average of the averages and assigned an average implied upside of 9.85% for all DJIA components.  If this were to be uniform and were not distracted by companies with larger share prices moving up more or less than the lower priced stocks, then the closing price of $10,428.05 for 2009 would imply a DJIA price of approximately $11,455.21 for 2010.  As for the DIAMONDS Trust (NYSE: DIA) this implies an upside target of roughly $114.32 for the same period and not taking any index/ETF price tracking changes into account.

We have already given some caveats here.  First and foremost, if we used the formal price targets and new implied weightings and backed out dividend payments then we’d end up with a slightly different figure.  More importantly, research departments go almost dark in the last two weeks of any given calender year and there are gaps of coverage updates at the end of the year.  And that being said, price targets at major research firms often get updated throughout the first weeks of a new calendar year.  So toward the end of January we would consider revisiting this to look for new implied targets.  We did not include P/E ratios as we normally would since this is the same sort of screen which many value investors would use.  The last caveat is also the most irritating one: analysts are fickle and wishy-washy when it comes to price targets, so all of these figures will vary with the direction of the stock market performance.

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JON C. OGG
January 4, 2010