24/7 Wall St.

As each new year replaces the prior year, 24/7 Wall St. looks at the individual targets on all 30 Dow Jones Industrial Average price targets from Wall Street analysts to come up with a peak price for the DJIA in the year ahead. It turns out that when you blend the targets of the 30 DJIA stocks equally, the target prices have come within about 1% in each of the past two years.

In 2010, the methodology called for a target of 11,455 and the DJIA closed out at 11,577.51 for the year. In 2011, the methodology called for a blended peak consensus of 13,042.06. While the DJIA closed 2011 up 5.5% at 12,217.56 for the year, the peak 2011 DJIA price was 12,928.50. Using stock market projections often feels like a game of horseshoes, or a bit like throwing hand grenades, because being close enough is generally all that matters. The blended DJIA price target peak for 2012, using the 24/7 Wall St. methodology is 13,678, or a gain of 11.96%.

Amazingly enough, this year’s projected figure may actually be understated because this removes the wild card performances of Bank of America Corporation (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM). Bank analysts have price targets that are still much higher than current prices and these have a low weighting in the actual share price weighting of the DJIA methodology. For that reason, the 13,678 is based upon 28 components. If we included the target using our methodology with just J.P. Morgan Chase & Co. (NYSE: JPM) shares, we would get an expected gain of 12.9% to 13,793; but if we also include the large upside targets to Bank of America Corporation (NYSE: BAC), then the DJIA target would be 14,035 for a gain of 14.88%.

There are caveats that have to be considered, particularly for a projected gain of almost 12% in 2012. The first is that analysts as a group are often too bullish, and the second is that this is intended to represent a peak level of 2012 rather than a year-end call. Only one of the 30 DJIA components, Verizon Communications Inc. (NYSE: VZ), is trading above its consensus price target from Thomson Reuters due to fresh highs in the stock. Many DJIA stocks closed well under their 52-week highs, but most consensus price targets on the 30 DJIA components would actually hit new 52-week highs in 2012 if the analysts are correct. A solid fourth quarter for U.S. stocks is part of why the analysts are still excited on individual stocks in 2012.

2011 was a very volatile year. The United States lost its prized Triple-A rating by S&P, emerging markets cooled off, the European Union went into meltdown mode, and all the while the big American companies managed to grow earnings, buy back stock at a feverish pace and even managed to grow their dividends. The last quarter for the DJIA was actually up about 12% versus 5.5% for the year. The broader market of the S&P 500 was up 11% in the fourth quarter but managed to close out the year literally 0.04 points lower than a year earlier.

The best of the 30 DJIA stocks was McDonald’s Corporation (NYSE: MCD) with a gain of about 31%. It rose so much that analysts now only see about 3% upside, based on year-end price target objectives. The three highest price components helped the DJIA gain as follows: International Business Machines Corporation (NYSE: IBM) rose about 27%, Chevron Corporation (NYSE: CVX) rose almost 20%, and McDonald’s Corporation (NYSE: MCD) rose over 30%. Warren Buffett even bought about $10 billion worth of IBM shares.

There were also many big losers out of the 30 DJIA components. A 58% drop in Bank of America Corporation (NYSE: BAC) shares made it the worst performer of the 30 DJIA stocks. Other big losers were Alcoa, Inc. (NYSE: AA) at -43%, Hewlett-Packard Co. (NYSE: HPQ) at -38%, and even J.P. Morgan Chase & Co. (NYSE: JPM) was dragged lower by almost 20% as the bank stocks slid. A couple of key components were barely changed. General Electric Co. (NYSE: GE) managed a small gain of almost 1.4% and Caterpillar Inc. (NYSE: CAT) closed down 1.5%.

The DJIA projection methodology has come within about 1% in each of the past two years. Does it seem too good to be true for 2012? With how sensitive the economy is today, it feels like it may be too good to be true. 2011 was so volatile and the DJIA performance of 5.5% compared to basically a total wash on the S&P 500 performance. Is it fair to question a methodology that worked for the past two years? If the DJIA hits 13,678 in 2012, that would compare to a high of 12,928.50 over the past year.

There are at least some things that could drive such a bullish projection. 2012 is an election year and that has often helped stocks. Will the gridlock of today interrupt 2012? The recession is now two and a half years in the rear-view mirror. The problems at the end of 2011 are likely to act as continued headwinds in 2012. Europe is still on the border of crisis. China is not posting the blazing growth needed to drive mature economies. Many segments of the manufacturing sector have excess capacity and moderate demand. Still, traditional valuations of stocks today are very low by historic standards. Companies are still raising dividends and still repurchasing stocks.

The Dogs of the Dow have a yield of roughly 4% for 2012. The 10-Year Treasury yield closed out 2011 at only 1.87% and the 30-Year Treasury Bond closed out 2011 with a yield of only 2.89%. After a rough glance, it looks like 24 of the 30 DJIA stocks have a higher yield than the 10-Year Treasury Note, and 13 of 30 even outyield the 30-Year Treasury Bond. This sets up a scenario where income-oriented and yield-hungry investors may use the DJIA and other established dividend players as competition for income rather than buying Treasuries.

Will Ben Bernanke’s promise to keep interest rates exceptionally low through mid-2013 hold true? Even if it does hold true, by the end of 2012 that promise will have only six months or so left to it. Are not markets supposed to be price exploration mechanisms for the months and year ahead?

Of the other 30 DJIA stocks, there are some good things to look forward to and some headwinds at the same time. Cisco Systems, Inc. (NASDAQ: CSCO) is trying to turn itself around. Intel Corporation (NASDAQ: INTC) recently gave a big revenue warning, and that may hold back more interest in Microsoft Corporation (NASDAQ: MSFT). Pfizer Inc. (NYSE: PFE) and Merck & Co. (NYSE: MRK) both made good gains in 2011 despite a patent expiration cliff and less-than-exciting drug pipelines. And Wal-Mart Stores Inc. (NYSE: WMT) is entering 2012 after a near 14% gain and is acting like it wants to surge to new multiyear highs.

If the implied gains of almost 12% do somehow manage to come true in 2012, the implied peak target on the SPDR Dow Jones Industrial Average (NYSE: DIA) would be roughly $136.47, if the performance of the ETF matches the index performance tick for tick.

We have a breakdown on each of the 30 DJIA stocks in the chart below. We compiled the 2011 closing price, the implied price target using Thomson Reuters mean target objectives, what the implied upside would be for each target, a 52-week trading range in 2011 for each and the dividend yield of each.

The projections of a 12% gain in 2012 feel too optimistic on the surface. Many sectors still face headwinds, and it seems like many stocks have recovered in the fourth quarter of 2011 to the point that they are already reflecting great news ahead. The Home Depot, Inc. (NYSE: HD) rose by more than 20% in 2011 and it is up almost 50% from its 52-week low. The DJIA is a share price-weighted index and that can throw off all of the targets, so the DJIA performance is highly dependent on the performance of International Business Machines Corporation (NYSE: IBM), Chevron Corporation (NYSE: CVX), and McDonald’s Corporation (NYSE: MCD) in 2012. To show how dependent the DJIA is on these three, it turns out that one-tenth of the DJIA’s 30 stocks comprise about 24.2% of the entire DJIA. At the other end of the spectrum, the 10 lowest priced components only account for about 13.1% of the entire DJIA weighting. The 15 lowest weighted components only make up about 25.1% of the entire weighting.

The price-weighting almost implies on paper that components like Bank of America Corporation (NYSE: BAC) and Alcoa, Inc. (NYSE: AA) are immaterial to the index. Even the great General Electric Co. (NYSE: GE), with its $189 billion market value, seems immaterial to the DJIA with a mere 1.11% weighting in the DJIA. Those are of course assuming that the performance of each stock would solely be in a vacuum or uncorrelated to the broad market. The reality is that if things suddenly became gangbusters for those three smallest components, then it means the economy is probably booming.

Again, 24/7 Wall St. tallies each DJIA component with an equal-weighting to come to a price target for the index rather than the price-weighted methodology of the DJIA. The reason is simple enough: there is no way that every target will remain static ahead nor that each stock will perform exactly as expected. Stock splits or large dividend payments from the highest weighted stocks could greatly change the price-weighted outcome as well. Many events could arise in an individual stock and there are just too many moving parts to worry about each component individually by our take.

Read Also: Small Caps With 50% Upside in 2012

Another issue to consider is that many analysts likely will update their price targets in the first few weeks of January, and it would be a guessing game to predict what the price targets will move to after earnings season gets into full swing late in January and in February. We are likely to update this outlook at the end of January or beginning of February to see if the targets have changed much.

There is another caveat to consider, and that is that analysts are often fickle and wishy-washy when it comes to price targets. The price targets tend to rise after the market moves higher and they tend to be lowered after the market moves lower. That is just part of the game. If you look back at the price target objectives on each component from a year ago, many price targets were very different.

Again, we want to note that the implied DJIA target of 13,678 for 2012 is more or less of a peak value for the year ahead. Frankly, it almost seems to good to be true after how volatile the markets have been.

JON C. OGG

Sources: Consensus price targets are the mean target offered by Thomson Reuters; performance of DJIA stocks is from Finviz.com; individual DJIA weightings from Indexarb.com.