Now that 2017 has ended and 2018 has gotten off to a strong start, it’s important for investors to consider how they want to be positioned for the year ahead and beyond. The Dow Jones Industrial Average (DJIA) and S&P 500 have risen more than 300% since their panic-selling lows back in March 2009, and that means this strongest bull market most investors have ever seen is nearing nine years old. Due to tax reform, increasing earnings and accelerated global GDP growth, most Wall Street strategists are calling for more gains in 2018.
The Dow rose 25% and the S&P 500 rose by almost 19.5% in 2017. Those gains greatly outpaced the forecast at the start of 2017. 24/7 Wall St. has its own annual forecasting tool showing that DJIA at 26,400 and at least 2,855 on the S&P 500 are the baseline targets for 2018.
Note that some of the Dow’s largest constituents already have zoomed to where some analysts feel they are overvalued. The Dow is now full of technology stocks, and these components are going to have to do their part for the broad market to keep rallying in 2018.
The Dow’s three tech laggards are Cisco Systems Inc. (NASDAQ: CSCO), Intel Corp. (NASDAQ: INTC) and International Business Machines Corp. (NYSE: IBM). Cisco generated gains 26% in 2017, followed by a gain over 27% by Intel — but IBM generated a loss for investors of more than 7%. That would have been even worse without the dividend.
If the Wall Street strategists are looking for another 6% to 8% gain in the markets in 2018, it seems interesting that they are looking for broader upside from many of the key technology stocks. Still, these three technology stocks are all still well under their all-time highs. Maybe it’s time to see what can make them rise after all.
24/7 Wall St. has created a bull/bear analysis on each of these three, as well as how they play role in the Dow now and how they need to grow ahead.
Cisco Systems: Still Short of All-Time Highs by Far
Cisco was expected to return about 13% in 2017, but the stock closed out the year at $38.30, for a total return of about 26.7%. The new consensus target of $38.92 and the 3.03% dividend yield would generate a total return of 4.65% this year, if the analysts are proven right.
Cisco shares peaked at close to $77 back in the 2000 tech bubble. The shares have recently hit new decade highs, and it has an impressive dividend.
Also, Cisco now is under the relatively new leadership of Chuck Robbins, after more than 20 years of leadership by John Chambers. The Cisco of today looks very different from the Cisco of old, with an endless slew of mixed acquisitions and with the company moving ever more toward a recurring revenue model rather than just selling networking systems and upgrading them each new cycle.
Analysts raised target prices in November after Cisco’s earnings. The new target prices above the consensus analyst targets were seen by Deutsche Bank ($45), Wells Fargo ($42) and Stifel ($42). Analysts also expect Cisco to raise its dividend for each of the coming years.
The broader S&P 500 was valued at 18.5 to 19.0 times expected 2018 earnings per share at the end of 2017, but Cisco shares ended 2017 valued at closer to 14.5 times its forward earnings per share estimate (blended 2018 and 2018 due to July fiscal year-end).
Cisco had a 52-week trading range of $29.80 to $38.99 at the end of 2017 and a market cap of $192 billion. Now its shares have peaked over $39 in the first few days of 2018. Its weighting in the Dow is about 1.1%, but the rank is roughly 25th of the S&P 500.
Intel: Changing Its Stripes, but Still Way Down From Highs
Intel finally surpassed analyst expectations in 2017, with an upside return of 27.3%. It originally had been expected to give a total return of only 13%. Unfortunately for Intel holders after the start of 2018, its shares tumbled due to security woes within its processors.
The processor and memory giant has been steadily diversifying away from chips just for personal computers (PCs) and servers. Most analysts investors had not given it much credit for the outsourced chip manufacturing operations for other companies, nor had Intel been given enough kudos for spending over $30 billion combined to acquire Altera and Mobileye. It had been as if the investing world thought Intel was stuck in PCs and servers and not much else.