5 Dow Stocks Seeing an Outstanding 2014

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U.S. equity investors made out like bandits in 2013. The S&P 500, ostensibly representative of business performance, increased 26.39 percent between January 2 and December 31 of that year. The Dow Jones Industrial Average, representative of a relatively narrow but significant slice of the wild world of business, increased 23.59 percent over the same period, and the Nasdaq climbed 34.2 percent as investors chased yield into the riskier tech, Internet, and pharmaceutical sectors.

One-third of the way into 2014, the market is playing out a lot of like market watchers anticipated in 2013. After such an incredible rally, the markets were bound to lose steam in 2014. Not only were valuations edging into “overheated” territory — the price-to-earnings of the S&P 500 averaged 17.81 in 2013, compared to a historic average of about 15.51 — but by year’s end, the Federal Reserve had begun to taper asset purchases, cooling the monetary stimulus that many feared was inflating another bubble.

As of April 24, the S&P 500 is still a little hot, with a PE of about 18.38, but the price level of the index has increased just 2.55 percent, while the Dow is up less than half a percent.

But an index is just the sum of its parts, and just because the market has traded sideways this year to date doesn’t mean that certain companies haven’t had a strong start to 2014. Here are a couple of Dow components that have had outsized growth so far this year, and that could keep the pace.

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1. Merck (NYSE:MRK)

Shares of Merck are up 16.25 percent this year to date. Merck is a major pharmaceutical company that has seen its shares rise largely as a result of its competent management of headwinds. For example, problems with research and development have made it more difficult for Merck to survive the expiration of patents on top-selling drugs. To address the issue, the company announced a fairly radical restructuring program (although it provided few details) that promises to cut costs and rethink the way it approaches its all-important R&D pipeline.

As part of the process, the company hired a new chief of R&D: Roger Perlmutter, who has been tasked with organizing company personnel and refocusing the scope of research and development projects. So far, things have been going pretty well. Merck stock jumped as much as 6.5 percent in January, after the company announced both that the Food and Drug Administration (FDA) had approved a pediatric version of its HIV therapy, called Isentress, and that it was mulling the sale of its consumer and animal health units.

Shortly after that, Merck said it was entering into a partnership with Belgian biotech company Ablynx in order to develop a new kind of cancer drug. Ablynx and Merck already have a neurology partnership stretching back to 2012; the companies’ new partnership will instead pursue an innovative new class of cancer drugs that activate the immune system. Currently, Bristol-Myers Squibb Co. (NYSE:BMY) makes the first drug of that kind in Yervoy, which is being developed to treat melanoma patients.

More good news came in April, when Merck announced that it received approval from the FDA for the first of three allergy medicines in its lineup. The drug, called Grastek, targets grass pollen allergies specifically, and Merck estimates that the potential U.S. market for its new allergy medicine is around 3 million patients, and that it will eventually be worth as much as $1 billion in annual sales.

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2. Caterpillar (NYSE:CAT)

Shares of Caterpillar are up 17.15 percent this year to date. The construction and mining equipment manufacturer suffered a pretty tough 2013 — earnings fell 33.3 percent, from $5.7 billion to $3.8 billion — but 2014 has brought new business. Recent earnings of $1.61 per share beat the mean analyst estimate by 29.8 percent, and growth is expected at 6.2 percent in the current quarter, despite headwinds that are anticipated to erode earnings for competitors.

“We understand we don’t control the economy and have instead focused on what we can improve,” Caterpillar Chairman and CEO Doug Oberhelman said in the company’s first-quarter earnings report. “We’re lowering costs, improving cash flow and driving value for our customers through the continued deployment of our lean manufacturing initiatives. We see the benefits of these actions in our first-quarter results and in improving market position for many of our products.”

Caterpillar is forecasting profit of $5.55 per share in 2014 and is looking for sales of $56 billion. Moreover, Caterpillar still managed to increase its dividend in 2013, and the company could be gearing up to increase it again. Caterpillar has raised its dividend every year for the past five years.

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3. Johnson & Johnson (NYSE:JNJ)

Shares of Johnson & Johnson are up 9.8 percent this year. The performance isn’t nearly as impressive as the dramatic rise experienced by Merck stock, but it’s still strong and reflective of a strong company. Earlier in the month, Johnson & Johnson reported first-quarter earnings that beat analyst expectations.

Sales increased 3.5 percent on the year to $18.1 billion, beating the mean analyst estimate of $18 billion. Adjusted net earnings increased 7.8 percent on the year to $4.4 billion, and diluted earnings increased 6.9 percent on the year to $1.54 per share, beating the mean analyst estimate of $1.48 per share. Worldwide pharmaceutical sales increased 10.8 percent on the year to $7.5 billion in the first quarter, the product of 12.2 percent operation growth and currency headwinds of 1.4 percent. Domestic sales increased increased 7.7 percent, while international sales increased 16.9 percent with a negative currency impact of 2.9 percent.

Johnson & Johnson dominates the global consumer health industry, a leading position supported by both strong pharmaceutical sales and by relatively strong sales of medical and diagnostic devices. Overall sales in this segment were flat on the year, at $7.1 billion, the product of a 1.8 percent operational increase eroded by 1.8 percent currency headwinds. Domestic sales were down 1.6 percent, but international sales were up 1.3 percent, the product of an operational increase of 4.6 percent and a negative currency impact of 3.3 percent.

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4. Microsoft (NASDAQ:MSFT)

Shares of Microsoft are up 7.3 percent this year as newly appointed CEO Satya Nadella — who has been in charge for a little more than two months — begins the process of potentially restoring the technology giant to its former glory. Nadella has been praised by many analysts and appears to have won the trust of investors because of his open attitude and his focus on new strategies. Although he hasn’t necessarily distanced himself from former CEO Steve Ballmer, who left on less-than-favorable terms with yield-seeking investors, he does represent a breath of fresh air at one of the market’s oldest tech companies.

Even though Microsoft has fallen behind its competitors, it is important to remember that the creator of the Windows operating system is still a very profitable company, and its results for the third quarter of fiscal 2014 proved that it is weathering the turmoil of the personal computer industry. Revenue matched forecasts, while profit beat Wall Street’s expectations; sales soared to $20.4 billion last quarter, roughly even with the $20.49 billion generated in year-ago results.

Operating income totaled $6.97 billion and net income came in $5.66 billion, pushing earnings to 68 cents per share. Comparatively, analysts had forecast Microsoft to generate earnings of 63 cents per share, a decline from the 72 cents per share earned in the year-ago quarter.

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5. United Technologies (NYSE:UTX)

Shares of United Technologies are up 5.8 percent this year to date. The technology conglomerate recently reported first-quarter sales of $14.75 billion, up 2 percent on the year and slightly ahead of expectations. Profits declined 4 percent on the year to $1.32 per share, but still beat analyst expectations by 5 cents. Adjusted earnings increased 10 percent on the year, and free cash flow clocked in at $1 billion.

“Continued organic growth and orders strength give us confidence in our sales expectation of $64 billion for 2014,” said Chairman and CEO Louis Chênevert in the earnings release. “Based on visibility to additional restructuring projects with solid returns, we now plan to increase restructuring spending from $300 million to $375 million, which we expect to be offset by one-time gains. The sales outlook together with continued cost reduction positions us to increase the lower end of our earnings per share range. We now expect earnings per share of $6.65 to $6.85, up from $6.55 to $6.85 previously.”

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