As the year gets off to a start, it is important to think about where the markets came from in 2016 and where they stand at the start of 2017 in order to make assumptions about how the markets will perform throughout the year. The Dow Jones Industrial Average closed out 2016 up 13.4% at 19,762.60, outperforming the 2016 gains of 9.5% for the S&P 500 and 7.5% for the Nasdaq.
24/7 Wall St. evaluates each of the 30 Dow components at the start of each year to come up with a forecast for the year ahead. Our bull-bear case pointed toward 19,700 for 2016, and that was without ever mentioning or considering the names Trump and Clinton in the outlook at that time. There does seem to be a path to Dow 22,000 that could come late in 2017, but it could also easily not come until 2018.
Using the Thomson Reuters consensus analyst price targets (mean) and taking total returns from dividends and past performance have to be given consideration. There are also internal business developments to consider on each company, and the technology sector is always in a state of change. For how the Dow can rise beyond 20,000, we have looked at three tech stocks having a singular role: IBM, Intel and Cisco.
Cisco Systems Inc. (NASDAQ: CSCO) ended the quarter down almost 4%, but the annual gain of 15.13% took shares to a year-end close of $30.22. Cisco is the largest dividend yield in the Dow’s tech giants, and it was even in the top five yields in the 2017 Dogs of the Dow.
Cisco’s consensus analyst price target from Thomson Reuters was $33.11 at the start of 2017. While this implied simple upside of 9.6%, the 3.4% dividend yield would make for an implied total return of 13.0% in 2017, if the analysts are correct.
Unfortunately for Cisco’s relation to the Dow, the reality is that it is the smallest weighted component at just 1.03% of the whole index. That means that Cisco shares could double, and if the rest of the Dow stocks were flat it would hardly make a difference to the Dow. Still, on its own it has above-average implied upside expectations and Cisco’s dividend remains solid for tech investors.
Valuations remain compelling for Cisco, and it is well-known that Cisco loves buying back stock. If the company is able to repatriate overseas cash, CEO Chuck Robbins even said directly that more stock would be purchased. Its earnings per share of $2.36 in 2016 is expected to rise to $2.49 in 2018 and $2.60 in 2019. That slow of earnings growth may be capping upside. Still, Cisco is valued at less than 13 times expected 2017 earnings expectations. Imagine if Cisco can deliver serious earnings upside after its years of restructuring efforts.
Cisco has been changing its model in recent years. It remains more focused on sales and enterprise-wide sales opportunities where it can offer networking, data center and security from the top to the bottom. One issue holding back Cisco is that many of the core growth markets (emerging markets) have been growing far less than their potential. China also has been a huge effort, even if domestic companies in China would rather get sales locally than letting Cisco get them.
In mid-December, JPMorgan’s tactical options team warned that Cisco was near a peak price and valuation with limited catalysts and unfavorable sector rotation. They recommend that shareholders buy protection (put options). The firm recently maintained only a $29 price target and emphasized a negative view. Also in December, Credit Suisse maintained its Underperform rating and a below-consensus target price of $25.
UBS took the more bullish side of the coin in December, addressing secular challenges but going at other issues around earnings weakness. UBS kept its Buy rating alive, as well as its price target of $35. That target was based upon 14 times expected 2017 earnings, and the firm thinks Cisco has superior margins over rivals in tech. UBS even called Cisco inexpensive on a free-cash-flow basis by almost one-third. The firm sees Cisco ONE as the first step to the company generating more recurring revenue from its core networking franchise
Cisco shares have a 52-week trading range of $22.46 to $31.95. The market cap is $153 billion, and the dividend yield is 3.4%.
Intel Corp. (NASDAQ: INTC) generated a return of almost 9% in 2016, with its year-end closing price being $36.27. Intel’s consensus price target of $39.89 suggests gains of almost 10%, and the 2.9% dividend yield would make for an implied gain of 12.9% on a total return basis in 2017, if analysts are accurate here.
The semiconductor and processor giant has a problem of its weighting in the Dow that is similar to Cisco, in that it is ranked quite low. Its low share price gives Intel just a 1.25% weighting in the Dow, making it ranked 27th out of the 30 Dow stocks. Similar to Cisco, Intel could double and it would hardly move the Dow’s index level, if the other components somehow did not participate.