Should You Buy These 3 Soaring Dow Stocks?
The Dow Jones Industrial Average has had a mediocre 2014, having risen just 2 percent. But if we look at the individual components, the price action has been far from boring. We have seen several stocks in the index display strong moves in one direction or the other, and three in particular – Intel (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), and Disney (NYSE:DIS) — have been soaring.
When stocks soar to multiyear highs, it can often mean that “smart money” investors see big things for these companies in the future, and it might be wise to jump on board despite the fact that the stocks have already run a lot. Then again, we need to be careful and make sure that we aren’t chasing gains, and it might make sense to wait for a pullback or to simply avoid the stocks altogether.
1. Intel (NASDAQ:INTC)
Intel has been a big winner this year, with shares up over 20 percent. Investors are enthusiastic about the company’s future because it recently reported that PC sales are not slowing at the 6 percent rate that analysts had initially thought they would. In fact, PC sales are expected to be flat. As a result, Intel shares are trading at multiyear highs, and yet they still trade at just 17 times earnings. With the broader stock market trading at 22 times earnings, Intel looks cheap by comparison, especially when we consider the company’s 2.9 percent dividend.
However, investors should keep in mind that while PC sales aren’t declining at the rate that analysts had expected, they are still expected to be flat to slightly down, and with the rise of tablets and smartphones, there is no reason to expect a strong uptrend in Intel’s shares unless you expect the company to steal additional market share from its already beaten-down competitor Advanced Micro Devices (NYSE:AMD).
Thus, I think the upswing in the stock has more to do with the fact that the stock had been priced for declining sales and cash flow, and this was too pessimistic of a scenario. With this being the case, if you are looking for steady income Intel might be a stock worth buying, but I don’t see much growth in the company’s future, and I would stay away at the current valuation.
2. Johnson & Johnson (NYSE:JNJ)
J&J shares have risen 15 percent for the year, thanks to rising margins, which have led to rising profits. The company reported a 30 percent year-over-year increase in EPS in the first quarter, and this has investors enthusiastic about the company. J&J is also considered to be a relatively safe company given its leadership in the healthcare sector. People cut back on a lot of things in a recession, but not on their healthcare expenses. With this in mind, I think a lot of investors are flocking to Johnson & Johnson shares just in case the economy turns south.
But if we take a step back, we find that J&J has had mediocre sales growth over the past several years. Furthermore, its recent earnings growth followed an earnings decline: Over the past three years, the company’s profits have risen just $500 million, which is negligible for a $300 billion company. But with the rise in profits, analysts have become more enthusiastic, considering that they are projecting this growth into the future.
This, coupled with the fact that defensive stocks are trading at a premium as investors thirst for yield, has driven the stock higher. Still, I would be hesitant to buy the shares here. While it is a quality company, Johnson & Johnson doesn’t have a lot of growth, and it is priced for perfection. Like with many defensive stocks, I think we have seen most of the upside, and the risk is to the downside — J&J is no exception.
3. Disney (NYSE:DIS)
Walt Disney Co. has risen in virtually a straight line since bottoming in 2009 at just $16 per share. Now it trades at $86 per share and it is up 14 percent for the year. The company has been growing earnings thanks to incredibly strong box office sales, which have compensated for mediocre theme park revenues. As a result, the company is reporting double-digit earnings growth and investors are flocking to the stock. While the shares trade at 22 times earnings, the company’s recent growth seems to justify this.
Disney is probably the best of the three stocks I’ve listed here because the company is actually growing. But at the same time, it is probably the riskiest stock of the three because if the economy turns south, then several of the company’s businesses can take a huge hit; this could send shares sharply lower. Keep in mind that during the financial crisis, Disney shares fell from $35 to $16 in just a few months.
While it is unlikely that this will happen again, at $86 per share, the stock has a long ways to fall in the event of an earnings decline. The best approach to take with this one is to treat it as a trading vehicle. The stock will rise so long as the company continues to grow earnings, but it could lose its momentum and investor appeal rapidly, and so I would use a stop order and take profits on the way up.
Disclosure: Ben Kramer-Miller has no position in the stocks mentioned in this article.