Technology

2018 Bull Market Outlook: Time for Cisco, Intel and IBM to Boost the Dow Even Higher

Jon C. Ogg

Published: January 5, 2018 8:35 am

Last Updated: January 12, 2020 4:48 am

Now that 2017 has ended and 2018 has gotten off to a strong start, it’s important for investors to consider how they want to be positioned for the year ahead and beyond. The Dow Jones Industrial Average (DJIA) and S&P 500 have risen more than 300% since their panic-selling lows back in March 2009, and that means this strongest bull market most investors have ever seen is nearing nine years old. Due to tax reform, increasing earnings and accelerated global GDP growth, most Wall Street strategists are calling for more gains in 2018.

The Dow rose 25% and the S&P 500 rose by almost 19.5% in 2017. Those gains greatly outpaced the forecast at the start of 2017. 24/7 Wall St. has its own annual forecasting tool showing that DJIA at 26,400 and at least 2,855 on the S&P 500 are the baseline targets for 2018.

Note that some of the Dow’s largest constituents already have zoomed to where some analysts feel they are overvalued. The Dow is now full of technology stocks, and these components are going to have to do their part for the broad market to keep rallying in 2018.

The Dow’s three tech laggards are Cisco Systems Inc. (NASDAQ: CSCO), Intel Corp. (NASDAQ: INTC) and International Business Machines Corp. (NYSE: IBM). Cisco generated gains 26% in 2017, followed by a gain over 27% by Intel — but IBM generated a loss for investors of more than 7%. That would have been even worse without the dividend.

If the Wall Street strategists are looking for another 6% to 8% gain in the markets in 2018, it seems interesting that they are looking for broader upside from many of the key technology stocks. Still, these three technology stocks are all still well under their all-time highs. Maybe it’s time to see what can make them rise after all.

24/7 Wall St. has created a bull/bear analysis on each of these three, as well as how they play role in the Dow now and how they need to grow ahead.

Cisco Systems: Still Short of All-Time Highs by Far

Cisco was expected to return about 13% in 2017, but the stock closed out the year at $38.30, for a total return of about 26.7%. The new consensus target of $38.92 and the 3.03% dividend yield would generate a total return of 4.65% this year, if the analysts are proven right.

Cisco shares peaked at close to $77 back in the 2000 tech bubble. The shares have recently hit new decade highs, and it has an impressive dividend.

Also, Cisco now is under the relatively new leadership of Chuck Robbins, after more than 20 years of leadership by John Chambers. The Cisco of today looks very different from the Cisco of old, with an endless slew of mixed acquisitions and with the company moving ever more toward a recurring revenue model rather than just selling networking systems and upgrading them each new cycle.

Analysts raised target prices in November after Cisco’s earnings. The new target prices above the consensus analyst targets were seen by Deutsche Bank ($45), Wells Fargo ($42) and Stifel ($42). Analysts also expect Cisco to raise its dividend for each of the coming years.

The broader S&P 500 was valued at 18.5 to 19.0 times expected 2018 earnings per share at the end of 2017, but Cisco shares ended 2017 valued at closer to 14.5 times its forward earnings per share estimate (blended 2018 and 2018 due to July fiscal year-end).

Cisco had a 52-week trading range of $29.80 to $38.99 at the end of 2017 and a market cap of $192 billion. Now its shares have peaked over $39 in the first few days of 2018. Its weighting in the Dow is about 1.1%, but the rank is roughly 25th of the S&P 500.

Intel: Changing Its Stripes, but Still Way Down From Highs

Intel finally surpassed analyst expectations in 2017, with an upside return of 27.3%. It originally had been expected to give a total return of only 13%. Unfortunately for Intel holders after the start of 2018, its shares tumbled due to security woes within its processors.

The processor and memory giant has been steadily diversifying away from chips just for personal computers (PCs) and servers. Most analysts investors had not given it much credit for the outsourced chip manufacturing operations for other companies, nor had Intel been given enough kudos for spending over $30 billion combined to acquire Altera and Mobileye. It had been as if the investing world thought Intel was stuck in PCs and servers and not much else.

With Intel shares at $46.16 as of the end of 2017, the $47.07 consensus analyst target and the 2.36% dividend yield still only implied an upcoming return of 4.33% for 2018, if the analysts are correct. That pullback in the first days of 2018 has taken a bite in the stock — down to $44.25.

Credit Suisse has only a Neutral rating, but it said that Intel’s security issues were not unique to Intel and that it would not create customer departures nor much in financial expenses. And Intel already has announced a fix for close to 90% of the processors.

With the S&P valued at 18.5 to 19.0 times expected 2018 earnings, and with Intel believed to keep diversifying away from its legacy business, does Intel seem expensive at about 14 times earnings? Its dividend yield was 2.36% at the end of 2017, and analysts expect that dividend to rise in 2018 and 2019.

Intel has a 52-week trading range of $33.23 to $47.64 and a market cap of $214 billion. Its weighting in the Dow is about 1.30%, but the rank is roughly 20th in the S&P 500.

IBM: What It Takes to Fix IBM

IBM has continued to disappoint as the decline in the core IT services business cannot be mitigated by higher stock buybacks and increased dividends. IBM is growing its strategic imperatives efforts in the cloud, artificial intelligence, machine learning and in other growth segments. IBM was only expected to generate a return of −2.2% for all of 2017, using its January bull/bear analysis, but its return of −7.6% was even less impressive.

With IBM shares at $153.42 apiece at the end of 2017, the big question is how IBM can get its stock back up to $175 and then to over $200. With the S&P valued at 18.5 to 19.0 times expected 2018 earnings, IBM is valued at barely 11 times expected earnings. The problem is that there is no real growth, and IBM’s 19 consecutive quarterly reports of contraction is not expected to turn around in 2018 or 2019.

24/7 Wall St.
10 Things That Could Wreck the Bull Market in Stocks in 2018

What stood out at the end of 2017 was that analysts had a consensus target price of $163.74. Along with a dividend yield of 3.91%, that implied a total return expectation of 10.64% in 2018. RBC Capital Markets kicked off 2018 with an aggressive IBM call with a target price of $180. The firm is looking for cyclical and secular catalysts with gross margin stability.

Another consideration for investors is the reign of CEO Ginni Rometty. This has been a disappointment for investors since it began in 2012. In the past five years, IBM had a high above $210 a share at the start of 2013 and it hit a low of $125 in early 2016. With market excitement continuing in 2018, IBM was last seen closer to $162. 24/7 Wall St. has identified Rometty as a candidate that needs to go, including her in the list of 20 worst CEOs of 2017.

It remains questionable whether IBM really will win under tax reform. While the United States had a nominal corporate tax rate of 35%, and while that rate is dropping to 21%, here is what IBM listed as its rate along with third quarter earnings: effective GAAP and operating tax rates were 11.0% and 14.7%, respectively, and IBM said then that it expected a full-year effective operating (non-GAAP) tax rate of 15% (plus/minus three points, and excluding discrete items).

IBM’s 52-week trading range is $139.13 to $182.79, and it has a market cap of $147 billion. Its weighting in the Dow is 4.28%, but the rank is roughly at 37 of the S&P 500.

Some investors are going to be more aggressive in 2018 under corporate tax reform. Others investors may think it’s more sensible to expect that 2018 could be a bumpier stock market ride than 2017. 24/7 Wall St. outlined how lower volatility strategies may be more appropriate for a “chicken-bull market,” meaning that they can get much of the stock market upside if the market keeps rising but look to minimize their downside of the market stumbles.