4 Dow Stocks Hitting Multiyear Highs Despite Index Underperformance
Last week wasn’t such a great week for blue chips, as the Dow Jones Industrial Average fell by 0.8 percent. This is part of a larger trend: The Dow is underperforming this year. It is up just 4 percent while the S&P 500 is up 8 percent and the Nasdaq is up 7 percent.
This underperformance is largely due to the Dow’s composition. It is an index comprised of just 30 stocks, and it is weighted based on these stocks’ prices. This doesn’t make a lot of sense. Consider, for instance, that Chevron (NYSE:CVX) makes up a larger part of the Dow than Exxon Mobil (NYSE:XOM) despite the fact that the latter is a much larger company. The reason is that Chevron has a higher share price but fewer shares outstanding.
It just so happens that stocks with high share prices in the Dow haven’t been performing so well. For instance, the Dow’s largest component is Visa (NYSE:V), which fell pretty hard on earnings last Friday, and this took its toll on the Dow. That stock, which had been a stellar performer in 2013, is currently consolidating its gains, and it is down 3.5 percent for the year. Other large Dow components, such as Goldman Sachs (NYSE:GS) and IBM (NYSE:IBM), aren’t doing so well, either.
Nevertheless, this hardly tells the whole story. There are several Dow stocks that are performing just fine. In fact, four of them hit either all-time highs or multiyear highs. These are companies that are executing strongly, growing their profits, and rewarding long-term shareholders. Thus, they could be strong candidates for investors to purchase in the coming weeks, especially if we see a much-anticipated pullback.
I grouped these two together because their stocks are driven by largely the same factors. They are both energy companies that are benefitting from a strong oil price, which has sustained the $100 per barrel level throughout most of the year. They are also fiscally disciplined companies that don’t have a lot of debt outstanding and that only make the highest-quality investments. Finally, they are shareholder friendly. They both pay dividends and repurchase their own shares, so that each individual share represents a larger portion of the company over time.
Chevron appears to be the more appealing option at this point in time. It pays a higher dividend of 3.2 percent – Exxon Mobil pays 2.7 percent – and it trades at a lower price-to-earnings multiple at 12.5 versus Exxon’s 14. But it may not be the better option. Exxon Mobil spends more money on stock repurchases, which, unlike dividends, aren’t taxed, and so they are the more efficient means for a company to return capital to shareholders. Furthermore, Exxon Mobil has a higher return on equity and a return on invested capital, meaning that it has generally made wiser investments than Chevron. But I think investors looking for exposure to high-quality oil companies that lack volatility will do fine in either or in both.
3. Intel (NASDAQ:INTC)
Intel is currently soaring. The stock is up 32 percent for the year on the company’s strong second-quarter earnings announcement, which showed that management is growing the company’s earnings after years of stagnation. Furthermore, we are seeing that mobile devices and tablets aren’t cannibalizing the PC market, and this benefits Intel enormously.
Intel continues to dominate the computer chip market, and it is constantly innovating. It is highly profitable and shareholder friendly: It pays a 2.6 percent dividend. Since the stock is up so much for the year, I would hesitate to take a position now. However, given its dominance, and given the fact that the stock is breaking out of a long-term trading range, I think this is a stock that you can consider owning if it comes down a bit.
4. 3M (NYSE:MMM)
3M is the most expensive stock on the list, and admittedly it is probably the least attractive. It is doing so well because its sales are breaking up as demand for the company’s products rises. It has been buying back stock fairly aggressively, and this has led to a total reduction in the number of shares outstanding. For this reason, the company’s earnings per share are growing in the double digits, and analysts expect this growth to continue.
Nevertheless, the stock trades at 20 times earnings, which is expensive, especially when I have listed three stocks that are substantially less expensive. Furthermore, I tend to avoid investing in conglomerates. I like focused investments, and 3M seems to be all over the place. If you look at the price action of 3M, the shares may be hitting new highs, but they aren’t exactly powering higher. I suspect that we could see a correction in 3M shares in the near term, although I don’t think I’d be a buyer.
Disclosure: Ben Kramer-Miller is long Exxon Mobil, Chevron, and Visa.
More from Business Cheat Sheet: