Investing

Sell In May And Go Away? A 2012 Primer (BAC, JPM, GE, AA, CAT, MSFT, INTC, AAPL, XOM, CVX, DD)

General Electric Co. (NYSE: GE) recently confirmed that its earnings were still on the mend and it remains the conglomerate which the market tries to use as a proxy for the American economy. Its GE Capital is expected to soon be in a position to start paying a dividend back to the GE parent company.  The company raised and raised its dividend over the last year and it is now back to a yield of 3.5% with the promise to grow its dividend at about the same rate it grows its earnings.  With expected earnings growth of more than 10% for 2012 and 2013, investors buying GE might be sitting on a theoretical dividend yield at their cost basis of over 4% at some point next year.  Shares are up 9.5% year to date at just under $19.50, and the consensus analyst target of about $22.50 implies upside of about 15%.

Alcoa Inc. (NYSE: AA) is one we always argue against as a true metals and economic barometer but it is always the first DJIA component to report earnings each quarter and the only dedicated leading metals component in the DJIA.  Shares are currently around $9.80, which is still up about 5% from its pre-earnings level of $9.32.  It is also still down from $10.02 at the end of March.  Thomson Reuters has a consensus price target of $11.85, indicating upside of 20% or so over the next year.  Alcoa still maintains that the global aluminum market will double this decade.

Caterpillar Inc. (NYSE: CAT) may have reported that its profit jumped 29% in the first quarter and it may have tried to talk up its internal guidance, but shares fell from $108.40 before earnings to $103.44 the day after earnings.  The market may have some valuation concerns here with the growth markets faltering more than the company claims, but the stock is now down more than 10% from recent highs of over $116.00 and its consensus analyst price target north of $130 implies upside of more than 25% if the analysts are correct.  This one also trades under 11-times expected 2012 earnings estimates.

Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC) both managed to turn in decent earnings reports with low valuations, but Microsoft was probably left with a bit more upside as Intel was getting more fully valued.  With Intel at just under $28, its 52-week range is $19.16 to $28.78.  It offers a 3.1% dividend yield, but the consensus target has been raised to only $29.65 and that implies upside of only about 3.1%.  Microsoft, on the other hand, trades around $32.20 and its 52-week range is $23.65 to $32.95. Its yield is less at about 2.5%, and its consensus price target objective of $35.40 indicates an expected upside of just under 10%.  Intel trades at only about 11.2-times expected 2012 earnings versus about 11.8 times for Microsoft (or 10.6-times if you use fiscal June-2013 estimates).

Apple Inc. (NASDAQ: AAPL) is not a DJIA component but it is almost its own effective asset class at this point.  The shares were literally on their way to a 10% correction for the two weeks ahead of earnings, but this was after a 50% rise from the start of 2012.  Shares are back up at $610 and the company is truly an earnings beast.  With huge growth rates, it trades at only 13.1-times expected September-2012 earnings and only 11.3-times September-2013 earnings estimates.  While the consensus price target is now over $700 and implying upside of about 15%, some calls have surfaced for Apple to be worth closer to $1,000 or even higher.

What about Big Oil? Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) are likely to depend upon the price of oil going forward, but these two DJIA components both just raised their dividends on the same day in late-April.  Exxon raised its payout 21% and Chevron raised its payout by 11%. Chevron still leads the dividend race with a yield of almost 3.5%, and at just under $104 its 52-week range is $86.68 to $112.28 and its consensus analyst target of $125.25 implies upside of close to 20%. Exxon now yields about 2.7% and at just under $87 it has a 52-week range of $67.03 to $88.13 and its consensus analyst target is almost $95 for almost a 10% upside.  Exxon trades at about 10-times 2012 expected earnings versus only about 8-times earnings for Chevron.

E. I. du Pont de Nemours and Company (NYSE: DD), or DuPont, managed to recently beat its earnings as its agriculture unit is strong and as its chemicals and materials unit is being propped up by electronics makers.  With an earnings range provided of $4.20 to $4.40 per share for this year, DuPont’s price of almost $54 implies an expected earnings multiple of about 12.5-times for this year.  A consensus price target of $58.20 generates an implied expected upside of only about 8%.

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Perhaps the real question to ask is whether or not 11 companies can really give you a ballpark or a barometer for what lies ahead for the broader economy.  The DJIA Transportation Index has not offered much insight using Dow Theory.  This index has been range bound for most of 2012, which offers a no-man’s land expectation.  Maybe the real notion should be that the market can still rise as long as the transport index does not fall apart.  Maybe it implies that a “Sell in May and go away” outlook is still the right outlook but one that will not face as sharp of selling ahead.

JON C. OGG