Cramer's Dow 30 Prediction: 13K and Beyond
By Jim Cramer - 12/22/10 - 5:00 PM EST
NEW YORK (TheStreet
) -- People do a lot of top down analysis at this time of the year, trying to figure out how much the Dow and the S&P could go up--or down--in the coming year. That's not my style. As someone who is a stock picker, I like a bottoms up approach, analyzing each Dow component to come up with what I think the most visible index will deliver in 2011.
Here's my annual analysis, case by case, that adds up to a target of 13,365 for the Dow Jones
next year -- a 16% gain from current levels and a bountiful return -- based on a prognostication of the performance of the individual members of the venerable index.
Although I am a bottoms up guy, as a backdrop I am presuming a resumption of decent U.S. growth courtesy of the Fed
-- call it 3% to 4% -- continued worldwide growth, a stable to slight decline in the dollar and a decent rise in rates (30-year Treasury bond going to 4.8%) as befitting a return to economic health.
Still, I don't want to overplay the macro hand. I am seeing these terrific gains on the Dow from the players within, not the trends outside. Here's how I get to my 13,365 target.
: Let's start off with a bang. With just a $14 billion market cap -- and being the leading independent producer of a metal that will be in intense demand in 2011 because of boosted aerospace, autos and power plant production -- Alcoa will be hard-pressed to stay independent. Earnings have been depressed throughout the downturn, but the cash flow has picked up, courtesy the excellent stewardship of CEO Klaus Kleinfeld. If the company stands alone its stock can advance and get a 12 multiple, a slight discount to many of the cyclical stocks in the average, and that would put it at $18. But I think it gets bought out at $22, a fabulous return and perhaps my favorite in the whole average.
2. American Express
just doesn't get the rewards it deserves in this market with people constantly trying to lump it in with slow growth banks or Visa
which have been whacked by the Fed because of debit fees. American Express is a credit card company with fewer and fewer defaults and excellent growth, especially with the rebounding world economy, and it should be treated as such. I see the company earning $4 next year and deserving a 15 multiple, more in keeping with double-digit growth companies. Call it $60.
: This one has had a huge move already and will be losing exclusive selling rights for the iPhone to Verizon
. That's going to freeze the market and cause the company's growth rate to slip a tad, maybe to below 6%. If that happens the $2.50 estimates might come down, but just a few pennies. I worry more though that it will finally break its linkage with Verizon and get a tad less of a multiple. It will be bailed out by its bountiful yield but I don't see the company trading above $32 given the rate of rate of change upward and a small dividend boost. Still worth owning for the combined return however.
4.Bank of America
will settle the mortgage putback claims, put a lot of its bad mortgage loans behind it and have an assertive Merrill Lynch to boost its earnings. I think that this company, which trades basically at its cash value, will have a terrific year, especially because CEO Brian Moynihan should be growing into his role and become more of a spokesperson that can help this riddled brand. The integration of the three companies, original Bank of America -- itself a pastiche of many banks including Nations and Fleet, where Moynihan's from -- Countrywide and Merrill Lynch will finally be consummated in 2011. Glorious. Don't forget that despite all of the turmoil, Bank of America now has an unheard-of 20%-plus market share in the nation's mortgage market, and I think that market will come alive as the housing shortage of 2012, another of my predictions, comes about. I see this stock trading at $18, where it stood not that long ago, a terrific gain.
--Mercy, mercy, the Dreamliner schedule should solidify at last and even if Boeing produces just a few of these mammoth and insanely profitable planes, the stock will soar along with them. Production is key to this company because once it gets the cost down per plane -- something that happens as it makes more and more of them -- then the gross margins explode. I think that this stock could trade to $85 by year end because it is then inconceivable that the Dreamliner isn't being sold. Don't forget that aerospace makers have had seven-year cycles in the past, so I don't expect the stock to stop rallying in 2011. Lots of growth here for certain, and perhaps the most long-term visibility in all of the Dow.
: this stock could be a monster in 2011, especially with the integration of Bucyrus
, which I think will turn out to be a fantastic acquisition. Estimates, currently showing EPS at about $6, I think are way, way too low. I see this stock going to $120 in the next year. Too gutsy? Ask yourself what happens if the United States comes back as a growth nation. Right now almost all of the growth is overseas. Still a fantastic mineral play and a terrific call on world growth.
: I see oil going to $100 a barrel in 2011 given the expansion of the world's economy. Chevron is very levered to the price of crude--much more than Exxon--and I see it outperforming its peers. Nevertheless those who bought it because of its yield will, of course, be left high and dry as I think it can go to $110 on the strength of the oil price and a very aggressive plan to produce more oil. Just a great solid stock to own in 2011. Maybe the best management in the industry, too.
: I cannot hide my disappointment with this company and its management. CEO John Chambers seems to have lost his way along with this once terrific company. I am sure it can drift up a couple of points but it may actually have peaked as a business and will not be viewed as anything but a subpar growth stock. That's why I think that it won't be higher than $21 at this time next year unless John Chambers moves on and a new person takes over. Chambers has no credibility after failing to deliver on promise after promise.
: Growth is back and this fantastic company will shine in 2011. I think that the aggressive nature of management and the worldwide prospects for more sales, plus a turn in Japan, will mean a stock that rallies through the year, although not at the pace that Coke once thrilled us at. Then again that was 20 years ago, and this is a very mature growth stock. I think it can trade to $70, not bad considering the safety of the enterprise. More dividend boosts ahead and an aggressive buyback should also help the cause as the bottler buy will be behind them. I like this stock very much for those who seek a nice return with low risk.
: While it has one of the highest multiples in the Dow Jones Average, I still think it is an unrecognized gem, kept back by worries about the consumer and how much she is willing to spend on vacation. The franchises, the sequels, the ancillaries to the sequels the worldwide theme parks, all of them are undervalued when you consider the stock price. And Bob Iger is the most undervalued of all the major CEOs in this average. This stock could trade to $48 by a slight lift in the multiple and a slight beat of the $2.55 EPS that some of the major analysts are using.
: CEO Ellen Kullman may very well be the one of the most transformative managers in America, taking a company many thought was the ultimate cyclical chemical business, one totally at the mercy of worldwide growth -- or lack of it -- and remaking it into a life sciences, agricultural and health care powerhouse with some terrific chemical production. Do you remember when, last year at this time, people believed a cut in the dividend could be in the cards? I expect her to RAISE the dividend. DuPont could trade to $58 as more and more people recognize this is not the same old dowdy company that always fell on hard times when the U.S. construction industry took a header. No more. Kullman doesn't get enough credit. Maybe 2011 will change that. Fabulous for the shareholders.
12. Exxon Mobil
: Hmm. This is a tough one. Oil up $10 will certainly help, but the overpay of XTO Energy
, a nat gas company bought when prices were so much higher, will continue to bite earnings and the company's conservative nature will make it seem plodding versus the other companies here. I don't share the appreciation many have for this company. I regard it more as a bank than an exploration and production company. That's why I see it only inching up about $5 to $78 and change, a very disappointing member of the Dow considering what is does for a living.
13. General Electric
: Take it all with a grain of salt because I own some of this stock, but the General Electric is going to shine in 2011 with a big dividend boost and a return to growth. I like the back to the roots plan of CEO Jeff Immelt, taking the company away from the financial weighting that hurt it so much and back to its manufacturing legacy that it does so well. This company is at the forefront of energy creation, and could there be a better business than that for a world starved for energy? Already one of the higher yielding stocks in the Dow, GE can stay that way with dividend increases. The only thing that will keep it from being a high yielder is stock performance, a real high quality problem. Just a few years ago GE was in the $30s. That may be too much to ask, given that the street's still not trusting the company to deliver. But after a couple of superior quarters I think that perception will change, maybe radically, which is why I think the stock can go to the mid-20s. Call it $25. One to own in 2011.
14. . Hewlett-Packard
: Nope, not the one to own in 2011. I think that HP has taken a step backward and is now ripe for the pickings of every other company in the space, whether it be . Accenture
on the consulting side or . EMC
on the server side or Oracle
with Sun on the hardware and software side or Apple
on the PC side. I just don't see this company doing anything this year, and I really don't understand the strategy or the vision, in part because of a new CEO who hasn't explained it yet and in part because of the old CEO who left on such a bad note. I don't see a pickup in earnings and I think that the stock could finish lower than it starts. Call it $40. I hope I am wrong because I think that 2011 will be a good year for tech in general, but not for this company.
15. Home Depot
: It is clear to me -- if only me -- that housing will mount a comeback in 2011. Home Depot doesn't even need it, as we saw this year with its remarkable 23% return DESPITE housing weakness. A lot of that is CEO Frank Blake who has done a masterful job turning the company around. I see bigger ticket items finally being sold in far greater numbers -- where the margins are -- and comparable store sales better around the country. People think the company can deliver EPS of $2.25. I think that's too low. Maybe $2.30 is more like it, given the endless small boosts. Why can't it trade to $45 on that and the housing shortage I see coming in 2012. Another great year for Home Depot coming up.
. We are going to see people come around to Intel in 2011 as the McAfee
acquisition will turn out to be a real additive buy because security post WikiLeaks will be a major focus for many companies and McAfee is the answer. The average selling price of chips for Intel will go up, too and that's been the driver for the company in the past. It's just too cheap, selling at 10 times earnings, with a great balance sheet, lots of cash and a ridiculously high 3.3% yield. Intel's not going to get its old premium multiple back but it can certainly get a market multiple which puts the stock at $30, totally within striking distance.
:When this company talked about lofty EPS for 2015, initially the street was skeptical especially after IBM reported a blah quarter soon after the expectations were laid out. I now think the company has $20 earnings per share capabilities out three years and that $13 is doable for 2011. You keep the multiple the same and you get a $169 stock. I think it does just that. This one's cheap, way too cheap and it will be cheap next year, too, but on a bigger earnings base which is how it can get to my price target.
18. Johnson & Johnson
: Unless William Weldon steps down as chief executive officer after his multiple mistakes at the helm of this once great company, we are going to see a high $50s stock at best, with a yield of 4% that will not be attractive. I am convinced that the FDA will come down hard on the company because of its multiple recalls and 2011 will be the year that the tarnished brand will start tarnishing earnings. I am going to say $58 for a target, although Weldon's exit could take the stock to $66. I bet they don't do the right thing, though. They haven't yet. Why would we expect anything different. A down stock for an up year.
19. JPMorgan Chase
: The dividend's going to be boosted, the buyback enlarged, the earnings power revealed, the shroud gone. JPM's still the best-run bank in America, if not the world and CEO Jamie Dimon is one of our greatest bankers. The company really did come through this period relatively unscathed and with a better branch network, courtesy the dirt cheap price of Washington Mutual. This company's stock has done nothing, literally nothing, year over year. Unchanged! That won't be the case in 2011. I see it going to $50 propelled by earnings power and the dividend hikes. It will be the preeminent financial to own and become a staple of many a mutual fund's portfolio. Call it $50.
: This packaged food company just can't seem to do anything to boost its earnings power. CEO Irene Rosenfeld, who, along with J&J's William Weldon, resides on my Mad Money Wall of Shame, will be a hindrance to value. She managed to overpay for Cadbury, an acquisition that drew the wrath of the formerly patient Warren Buffett.
If it didn't have a decent dividend, I think the stock would slink to $25. But, barring a firing of Rosenfeld for her subpar job, I think it can hang around $28. You don't want a slow-growing packaged goods story in a nascent expansion in the United States, and Kraft won't be able to buck that trend. A real disappointer.
: We've got the best performer in the Dow for the last five years taking it on the chin for a month's worth of disappointing growth numbers. That seems wrong to me, too harsh, but it will take a change in those monthly numbers to the positive to get this company back to its 52-week high of $80.94. I think that happens and the company surpasses that lofty level, but not by much because it won't shine when other, more cyclical companies attract more buyers. But not shining versus the bright suns out there doesn't mean disappointment. I just don't think it can reprise its 23% 2010 return. I do think that a 15% advance can occur and that's why I am using an $87 target. Like the profile of Coca Cola, cautious people want safety, dividend and growth and that will power the stock higher, especially when people recognize that the last month's weaker numbers were an aberration.
: Try as it may, this once-formidable growth stock will not get is mojo back in 2011 despite the acquisition of Schering-Plough
, something that kept it from sinking into the red for 2010. I don't know how Merck can pull itself out of the low-growth morass without new blockbusters and I don't see any on the horizon. To me the stock's yield, 4% as I write, is all that keeps it from going down hard. Given that I think interest rates are going to continue to rise, that yield won't save the stock from being down for the year. I say $35 could be where this one ends up after languishing for the year. Not worth it. Abbott
, not a Dow stock, is much better if you need a drug stock in your portfolio.
: The disappointing analyst meeting and the negative previous quarter haunt this stock going into 2011. But if you are like me and believe there will be worldwide growth, you would be nuts not to consider buying this 13% grower for just 15 times earnings. 3M's got so much going for it in Asia and has so many new businesses--it remains the most potent inventor of new products among the major companies I follow--that I think it will drift back up to its 52 week high of $91 if not higher. Perhaps $100, which I think is my stretch goal given its $6.16 in composite EPS estimates. Why $100? I think the dollar gets weaker and this is one of the most sensitive companies to the greenback which means that $6.16 could be too low. Cheap stock that's in the penalty box because of the ever so slight shade down of earnings, a shade down that, when I analyze the company, is something that will be left behind in 2011.
. The stock's finishing down for the year and I think that's a precursor to next year's numbers. Microsoft is old tech. It is not a power in the internet tsunami and it is in the crosshairs of both Salesforce.com
and, more importantly, Apple
. I don't think it can go up much with that enemy's list. In fact, it will most likely stagnate despite its double-digit growth. I know people expect so much of this $225 billion market cap stock and that, too, will work against it. I see $26 at yearend 2011 and it will be the tech stock to avoid other than Cisco. Too bad the Dow doesn't have Apple in it. These Dow tech stocks are giving tech a bad name!
: You can change the CEO, you can buy another company, but you can't buy growth and Pfizer doesn't have it. We've got a nice yield and that's going to buoy the stock, or at least keep it from going down much lower. But headway? Way too much off-patent exposure. They don't call it a cliff for nothing. The growth is so minuscule and the multiple will follow it down, despite the best efforts of a new CEO, who surely has to be better than the last one. I see the stock at $16 next year and it will, again, not be the Dow stock to own.
26. Procter & Gamble's
been marking time long enough. The company gave you a low single-digit one-year return, rather paltry given all the new products, the emerging market growth and the sharetake from other players. I believe all will be improved upon in 2011 and that P&G will eat Colgate's
lunch because Colgate hasn't kept pace in R&D and marketing won't make up for it. Like Coca-Cola and McDonald's, you just can't get lights-out performance out of a mature company like P&G but $75, the price it reached at the end of 2007, certainly seems within reason. 2011 will be the year that the investments P&G has made for the future pay off and it goes back to being the gold standard of the packaged goods world.
: This insurer never ran into trouble like so many of its cohorts and yet somehow hasn't received the kudos its management deserves for steering the ship through the shoals of bad investments. Jay Fishman, the CEO, is easily the best executive in the insurance industry and Travelers will get its due in 2011, which will make it so that its 12% return in 2010 will seem quite small. I think it can trade to $68 and not be expensive, particularly when people begin to give the well-run insurers a nice premium to the ne'er-do-wells.
28. United Technologies
: Look, if I like Boeing, it's hard not to like United Technologies, which has a lot of similar businesses plus a booming heating ventilation and air conditioning business. United Technologies hasn't gotten the credit it deserves for the terrific build up in safety equipment or fuel savings (similar to the transformation of Honeywell
under CEO Dave Cote). In 2011, that will be rectified. Even if you kept the multiple the same you should get to at least $90. I think the multiple goes a tad higher and I am using a $95 target.
: This is Verizon's year. The iPhone's coming in quarter one which will lead to a growth spurt. The FIOS build out is largely paid for, and now the company can reap the benefits of the spend. The company's half-owned portion of Verizon Wireless will be paying some hefty dividends in 2011, and I think we will get a nice dividend boost. We're talking about the possibility of $40 being reasonable, if conservative, giving this stock one of the best risk-reward profiles we've got in the Dow or the S&P 500 for that matter. CEO Ivan Seidenberg has done a remarkable job turning this staid company into a growth vehicle with a nice dividend. It will be a core holding for many mutual funds.
: Too big, not exciting, not compelling on a value or a growth basis. That's too bad because it's better run than it used to be and its stores are a heck of a lot nicer. But Wal-Mart is everywhere. There's simply not a lot of room to grow in this country and Wal-Mart's trying to go international as fast as it can, something that really can't be rushed. The stock can inch up if only because of its balance sheet and buyback but it probably can't get out of its way for more than just a few points. To me it's got $57 written on it. Just way too many better retailers out there to draw enough interest. A dog of the Dow? Nah, just a not great performer again, reprising its low-single-digit gains of 2010.
Cramer owns shares of Alcoa, American Express, Bank of America, Boeing, Caterpillar, Coca-Cola, Accenture, EMC, Oracle, Apple, Intel, JPMorgan, McDonald's and Procter & Gamble in his Action Alerts Plus
charitable trust portfolio. He also owns GE stock.
-- Written by Jim Cramer in New York
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