It’s already 2011 and we have our outlook pieces for the year for sectors and indexes.  While most of our pieces are examining upside going into what is expected to be a solid 2011, we also have broken out some of our sectors that offer the least amount of upside.  The average upside for each DJIA component from analysts is expected to be 12.65% in 2011.  We have an implied target of 13,042 for the DJIA in 2011 after having come within about 1% in 2010 of the close.  We also have our list of the top six DJIA stocks with the most implied upside.  But what about those stocks which have the lowest implied upside because of 2010 performance?

We are taking a look at Caterpillar Inc. (NYSE: CAT), Chevron Corporation (NYSE: CVX), Exxon Mobil Corp. (NYSE: XOM), The Home Depot, Inc. (NYSE: HD), International Business Machines Corp. (NYSE: IBM), and Verizon Communications Inc. (NYSE: VZ).  The cut-off here was implied gains of under 5%, but one component is trading higher than the expected target price.

We have created a chart below showing the implied upside to the mean target provided as of the end of December from Thomson Reuters, as well as the dividend yields, and the 52-week trading ranges.  After the chart we have added in color and caveats that would alter those implied limited upside to consensus price targets.

Ticker	Price	Target	Exp. Gain	52 Wk Range	Dividend	From Low
CAT	$93.66	$98.31	4.9%	50.50 – 94.89	1.9%	Up 85.47%
CVX	$91.25	$95.12	4.2%	66.83 – 92.39	3.2%	Up 36.54%
XOM	$73.12	$75.08	2.7%	55.94 – 73.69	2.4%	Up 30.71%
HD	$35.06	$36.50	4.1%	26.62 – 37.03	2.7%	Up 31.71%
XOM	$73.12	$75.08	2.7%	55.94 – 73.69	2.4%	Up 30.71%
VZ	$35.78	$33.24	-7.1%	25.99 – 36.00	5.5%	Up 37.67%

Caterpillar Inc. (NYSE: CAT) closed 2010 out at $93.66, and the Thomson Reuters mean target for one year is $98.31 per share.  That implies only a remaining upside of 4.9%.  What investors need to know is that the limited implied upside here is due to extreme performance above and beyond what was expected a year ago.  The 52-week trading range was $50.50 to $94.89.  Yep, that is up about 90% from its lows.

The big catalyst for “CAT” is China, mining, and the continued recovery for 2011 and beyond.  The only reason it has limited upside is because of extreme performance with gains of more than 50% for all of 2010.  Its December sales trends might offer some insight.

Chevron Corp. (NYSE: CVX) closed out 2010 at $91.25, and the Thomson Reuters mean target for one year out is implied to have only about 4.2% upside to $95.12.  The stock is only 1.2% within its 52-week high and shares are up 36.5% from its lows after the BP disaster hit many oil names.  The dividend yield is 3.2%, but the big issue here is the price of oil and then the margins around refining.

Positive changes there mean higher prices for oil companies as the value of their reserves heads higher and higher.  Chevron peaked at $100 per share before the oil bubble popped in 2008.  For whatever it is worth, the one-year performance of Chevron was close to 20% during its continued turnaround, about twice as much as Exxon’s gains.  The gains for six months from close to the lows also outperformed Big Oil.

Exxon Mobil Corp. (NYSE: XOM) is the second of the DJIA oil stocks whose upside appears limited due to the recent gains.  Just like Chevron, Exxon hit skid row after BP and into the summer sell-off before posting a serious recovery with stocks in general and with higher oil prices.  After closing out at $73.12, it only has an implied upside of 2.7% to the mean target of $75.08.

The same caveats apply here for Exxon as Chevron: higher oil prices and better refining margins can make that price target obsolete.  Exxon peaked above $90.00 before oil got out of hand in late 2007 to 2008.

The Home Depot, Inc. (NYSE: HD) may seem counter-intuitive for the reason that it is among those with the least implied upside.  Having closed 2010 at $35.05, the implied upside is only about 4.1% to the mean target of $36.50.  The 52-week trading range is $26.62 to $37.03, so that target does not even imply 52-week highs.  The 2.7% dividend yield offers some cushion.  What happened at Home Depot is a monster rally in December.  Shares closed out November at $30.21, which generated December gains of over 15%.

Home Depot technically rose 31% from its lows of 2010.  The big issue to watch here is not just a housing recovery.  A recovery could come from home improvements and remodel revenues from the flood of foreclosure sales and distressed sales that took place in the second half of 2010 and that is expected to continue if the economy holds up and if mortgage rates do not keep rising too much.

International Business Machines Corp. (NYSE: IBM) was a surprise to see on the list of those DJIA stocks with the lowest implied upside of less than 5% for 2011.  Having closed out 2010 at $146.75, there is only an implied upside of 3.9% to the mean target of $152.53.  The tech and IT outfit has roughly a 1.8% dividend yield and shares rose more than 10% in 2010.

More importantly for IBM holders, that $147.53 high for the year was only 0.5% above the 2010 closing price.  Before publishing on Monday morning, IBM shares were indicated as challenging 52-week highs and that actually translates to all-time highs. At less than 12-times expected 2011 earnings and with major buybacks expected, many investors still feel that IBM is a cheap stock despite those analyst target prices.  If those beliefs are true, then analysts just have to play catch-up.

Verizon Communications Inc. (NYSE: VZ) is the only of the DJIA components which is actually trading above its mean analyst target price.  It closed out 2009 at $31.13 and closed 2010 at $35.78 for gains of about 15%.  That compares to closer to 11.6% for rival AT&T Inc. (NYSE: T).

The difference here appears to be continued excitement ahead of the Verizon iPhone.  A possible problem is that the payout ratio is high for its dividend versus expected income.  That is not unique to Verizon in telecom, but it is something to consider.  It seems that either analysts will have to raise their price targets or that Verizon needs to take a breather.  Verizon is also in The Dogs of the Dow for 2011.  Indications before publishing on Monday showed that Verizon was indicated yet higher again.

There are some real winner and some real losers in the DJIA looking back into 2010 and also ahead into 2011.  These snapshots were all based upon December 31 closing bell prices and the implied limited upside is actually due to these stocks having recovered substantially or having outperformed the broad market and peers.  We ran the Sloths of the Dow for 2011 and that list tallied up the DJIA’s biggest losers of 2010.  We also ran the list of DJIA components which have the most implied upside for 2011, and it is without surprise that some of those are also on the list of sloths.

Our DJIA target for 2011 is 13,402 and that is based upon the same methodology as the 2010 projection which landed within about 1% of the DJIA close for 2010.

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JON C. OGG

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