DJIA 2011: Best Targets Imply DJIA 13,042 (BAC, CSCO, XOM, GE, HPQ, INTC, JPM, MCD, MRK, PFE, PG, WMT, DIA, VZ)

Can the Dow Jones Industrial Average rise 12.65% more in 2011 after gaining about 11% in 2010?   Our calculations show the the DJIA is likely to hit 13,042.06 in 2011.  That’s a 12. 65% rise. At the start of 2010, we gave a DJIA 11,455 target for 2010 based upon the same methodology.  Our year-ago projection turned out to be a tad conservative as the DJIA closed 2010 out at 11,577.51.

We wanted to throw this out there to highlight DJIA giants like Bank of America Corporation (NYSE: BAC), Cisco Systems, Inc. (NASDAQ: CSCO), Exxon Mobil Corp. (NYSE: XOM), General Electric Co. (NYSE: GE), Hewlett-Packard Co. (NYSE: HPQ), Intel Corporation (NASDAQ: INTC), JPMorgan Chase & Co. (NYSE: JPM), McDonald’s Corporation (NYSE: MCD), Merck & Co. (NYSE: MRK), Pfizer Inc. (NYSE: PFE), Procter & Gamble Co. (NYSE: PG), and Wal-Mart Stores Inc. (NYSE: WMT).

Our target for the SPDR Dow Jones Industrial Average (NYSE: DIA) is $130.25 by the end of 2011. Our methodology generated a DIAMONDS target of roughly $114.32 for 2010 without taking any index/ETF price tracking changes and dividend payments into account.  The DIAMONDS closed out 2010 at a price of $115.63 per share.  Using stock market projections is often like a game of horseshoes or a bit like throwing hand grenades at your enemies… being close enough is generally all that matters.

We have a breakdown for the 30 DJIA stocks in the chart below.  We compiled the 2010 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 2010 for each, and the dividend yield is on each.

There are some problems here for using an average of 12.65% expected gain  even if the methodology worked in 2010.  There are caveats and we understand why some might say that the methodology is general.  The DJIA is a share price-weighted index and that can throw off all of the targets.

The reason we tally these up with an equal “average” is because there is no way that every target will remain static nor that each stock will perform exactly as expected.  Stock splits could occur, or large one-time dividends, or big upside or downside moves from top weighted components can come up.  Any of those factors can change the weighting and the expected outcome.  There are just too many moving parts to worry about each component individually when trying to be exact in index calculations.

As the results were in-line with last year’s outliers eliminated we just left the numbers alone and did not smooth out the figures for 2011 projections.  If we used formal price targets and new implied weightings on each and then backed out dividend payments, it is likely that the figures would be skewed.  We are using the hand grenade and horseshoes approach rather than the sniper approach.

Many of the big price targets at major research firms often get updated throughout the first weeks of a new calendar year, so we are likely to update this outlook at the end of January to see if there are refined new implied price target objectives.  We did not include P/E ratios as we normally would since this is the same sort of screen which many value investors would use.

There is also another caveat in this.  It is irritating, but analysts are often fickle and wishy-washy when it comes to price targets, so these figures tend to adjust higher as prices rise or they drop down as prices fall.  The directional move of the stock market alters targets and growth projections.  If you look at the price target objectives on each component from a year ago, many targets have moved higher with the market.  There were only two negative expectations for DJIA components a year ago, and this year there is only one as Verizon Communications (NYSE: VZ) has performed well.

Lastly, we want to note that the DJIA target does not always imply a year-end objective.  It is a fair value price target that is expected over the next 12-month period.  It was November 4, 2010 that our 11,455 price DJIA target given at the start of 2010 was first hit in 2010 and the DJIA did go above 11,600 on six different sessions in December before closing at 11,577.51 on December 31.

By the end of 2011, we will already be gearing up for the 2012 Presidential election and at least some of the candidates may be known.  Many seats in Congress can change or be up for grabs as well in that election due to deaths or resignations. The effects of QE2 and curre3ncy fluctuations will be more quantified in a year, and the outlook will suddenly be upon what is expected in 2012.

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JON C. OGG