The 10 Stocks That Will Lead the DJIA to 20,000
International Business Machines Corp. (NYSE: IBM) is now ranked number two with a 6.88% weighting. It ranked as the top dog of DJIA weightings for years prior to Visa being added to the Dow in 2013. IBM’s share price of $182 has not done much at all of late. The consensus price target is almost $192, but the highest price target is now $225. The base case rally is only about 5.5%, but the best case is a 24% rally. Again, the average DJIA stock would only have to rise less than 18% for the DJIA to hit 20,000.
For IBM to get back on track, perhaps the company reaches that $20 in earnings per share goal in 2015, and maybe then some. After that is hit, the company can refocus on growth opportunities. For the most bullish scenario to unfold, we would expect a resurgence in IT spending for major projects. Watson will have had to make a more meaningful contribution, as well as storage, cloud and other service initiatives. On the valuation front, IBM trades at less than 9.5 times expected 2015 earnings expectations. Imagine if investors were willing to pay 12 or 13 times earnings again for Big Blue.
Goldman Sachs Group Inc. (NYSE: GS) is larger than all other “banks” in the DJIA, even though it has no formal banking operations. It is the third largest weighting of the DJIA at 6.44%. With shares at $170, its consensus price target of almost $175 implies upside of only 3%. The highest analyst price target of $205 would imply upside of 20.5% if achieved.
The most bullish case for Goldman Sachs is one in which high-frequency trading is not killed, and one where the firm remains a trading powerhouse. The global underwriting markets will have had to remain robust. And perhaps the interest rates do not devalue its bond holdings too badly. The firm also will have to maintain grasp of its employee compensation. Another driving force will be if shares can depeg from book values in banks and brokers. The good news here is that Goldman Sachs trades at only 10 times expected 2015 earnings, and it has a massive room to improve its dividend payout.
3M Co. (NYSE: MMM) is not the largest conglomerate at all, with its $94 billion market cap, but its $144 share price makes it worth almost five times as much as GE despite a $267 billion market cap. Its rank is fourth in overall weighting in the DJIA, with a 5.5% weighting (versus a 1.02% weighting for GE). 3M has rallied handily, and its $144 share price compares to a mere consensus target price of $146.50. The street high on 3M is $160. That is only about 2% of a gain to the base case, but the street-high target implies gains of 11%.
The most bullish case for 3M likely involves the company using its equity as a currency to make an accretive acquisition, perhaps even a tax-friendly deal as has become popular of late. The company also will have to keep exceeding earnings estimates, with a 17.5-times forward 2015 earnings valuation. Investors will have to remain confident that valuations are not getting stretched in conglomerates and industrials.
Chevron Corp. (NYSE: CVX) ranks fifth among the DJIA weightings, with a 5.01% weight. This is a full 1% higher weight than Exxon Mobil, yet Chevron’s market cap of $252 billion is still barely half that of Exxon Mobil’s market cap of $447 billion. Chevron’s $132.50 share price would generate gains of basically zilch to the $132 consensus. Still, the $145 street high target implies gains of 9.4%.
Chevron’s upside case hinges on higher oil prices remaining the norm rather than the upside. This implies $100 to $110 per barrel. The company also will need to have a continued global opportunity, with fracking and offshore opportunities remaining available without much pressure. The good news here is that Chevron is trading at less than 12 times expected 2015 earnings, so imagine what happens if you get “multiple expansion” where investors are willing to pay up more for the same stock — even a higher multiple like in Exxon Mobil would do wonders here. The dividend hikes also will have had to remain a key policy.