Investing

The 10 Stocks That Will Lead the DJIA to 20,000

Boeing Co. (NYSE: BA) is the sixth largest Dow stock by weighting, with a 5.01% weight. With shares at $131, the consensus price target is now almost $154. The street-high target is $175. This implies a generally accepted upside of 7% and a top-end current expectation of a gain of 33%.

The upside case for Boeing is one where planes remain strong, and one where perhaps military spending becomes more comfortable, even if it is not robust. Another driver will be the private sector’s efforts to get into space, perhaps with a little more future government ambitions in space again. Boeing also trades at just over 15 times expected 2015 earnings, so the company is going to have to keep surprising on earnings and keep raising its dividend.

United Technologies Corp. (NYSE: UTX) is the seventh highest weighting, at 4.47% of the DJIA. A share price of $117 compares to a consensus price target of $129 and a street high of $138. The consensus target would imply 10.2% upside, but the street-high target implies upside of 18%.

The bullish case for United Tech is one in which the company keeps finding selective opportunities to drive earnings higher, even if that is via accretive acquisitions or tax-friendly deal making. UTC trades at almost 15.5 times expected 2015 earnings, so investors are perhaps going to need to be willing to pay up more for solid industrial earnings. Another improvement that will likely need to be seen is a higher payout than its 2% dividend yield.

Caterpillar Inc. (NYSE: CAT) is ranked as the eighth largest relative DJIA stock, with a weighting of 4.14% for the entire index. With shares now up close to $109, the consensus price target is about $112 and the street high target is $125.00. This implies an upside of only 2.75% to the consensus and almost 15% to the highest analyst price target.

Caterpillar has already managed to surprise to the upside. At this time it surprised almost everyone as the top DJIA stock of 2014, and that is with its growth markets still not in full recovery. The bullish case for Caterpillar is one where South America, China, India and other growth markets come back to near capacity again. The company also will need to surprise with earnings and live up to an ambitious stock buyback effort, because the industrial equipment giant is already at 15 times expected 2015 earnings.

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Johnson & Johnson (NYSE: JNJ) has continued to grow its price slowly but surely, and the $104.50 share price gives it a 3.99% weighting, making it the ninth highest weighting of the DJIA. Its consensus price target of $105 is effectively no gain expected, but the street-high target of $117 would generate upside of right at 12%.

The bullish case for J&J is one in which product lawsuits and product quality control seem to dribble off with the passing of time. Earnings surprises will be a must, and the company may need to consider some of the current trends of tax-friendly accretive acquisitions where possible. After all, J&J trades at a high 16.5 times expected 2015 earnings. That means J&J must not miss many steps along the next three years, and that 2.7% dividend yield will need to keep ticking higher as well.

Exxon Mobil Corp. (NYSE: XOM) is the tenth highest index weighing in the Dow. It seems odd that its weighting is 3.93% versus 5.01% for Chevron when you consider that Exxon Mobil’s market cap is over two-thirds again that of Chevron. Still, at $104, it has a slightly negative 2% implied downside to the $101.20 consensus target. But the $115 street-high target price from analysts would generate upside of 10.5%.

Exxon faces many of the same challenges and opportunities as the smaller Chevron. Its bullish scenario will need oil to remain high, above $100, and to be one where the company is back to making money from its huge natural acquisition of XTO in recent years. The company obviously will have to maintain its proven reserves, and the international ability for oil companies to operate needs to remain favorable. Exxon likely will need to keep up on its dividend growth game, and it trades at 13.5 times expected 2015 earnings. Imagine if investors are willing to pay closer to a market P/E multiple here again.

So, these are just the largest components. If you use the best analyst targets out there, the average would-be gain on average among these 10 stocks would be 18.5%, and that of course does not include dividend payments.

The DJIA would need to rise by roughly 17.6% to achieve 20,000, and Wall Street’s best assumptions are calling for an 18.5% average upside in the most dominant DJIA stocks. While the focus has just been on the largest DJIA components by weighting, the unwritten rule is that a rising tide will lift most ships.

Getting the Dow to 20,000 will not be a simple feat. That being said, if Europe and Asia get back to more normalcy and if the bull market remains, then asking for less than 20% total stock market appreciation over the next two or three years does not become an unreasonable expectation.

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