Dissecting the Dow's Underperformance -- Part I

 | Jan 03, 2013 | 7:10 AM EST
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Whither the Dow Jones Industrial Average in 2013, beyond that first, unsustainably nice day of the year? Despite Wednesday's rally, you have to be depressed and suspicious of how poorly this index performed in 2012, finishing up a pathetic 7.3% against gains of 15.9% in the Nasdaq's and 13.4% in the S&P 500. (We've already seen about half last year's performance on day one of 2013!)

Who are the culprits behind this underperformance? Who did well in a futile attempt to save the index from abysmal results vs. the others? What's next for the oh-so-venerable but -- at least last year -- out-of-synch index?

First, let's not blame Bank of America (BAC), which had been an anchor to leeward for ages and ages. The stock gained 109% last year and, frankly, given how cheap it is and that the housing recovery still seems to be in its infancy, it wouldn't surprise me if we saw still bigger gains. They'll be stutter-step advances, to be sure -- wracked, no doubt, by each sequestration boogie-man and every debt-ceiling debacle. Still, this stock could have much further to go.

I remember that, when the other bank stocks stabilized, BofA took not one leg down, but a second one, too. In part this was because of lawsuits, but it was also because of the myriad problems with the colossally horrible Countrywide acquisition. But then came a cash infusion from Warren Buffett, a cessation of the lawsuits and the overall housing recovery. These, coupled with massive cost-cuts, have led to a catch-up rally that could take this stock to $16 before it is fairly valued against the other institutions.

Don't blame Home Depot (HD) for the lagging Dow, either. Shares of this company, captained by the amazing Frank Blake, managed to gain 47% -- an outsized return that wasn't all from the housing recovery. The management here could have pulled off a nice gain just taking market share from others. I have no doubt that the rebuild from Hurricane Sandy, plus the resurgence of housing nationwide, will benefit Home Depot again. New Jersey Governor Chris Christie's blast of the Republican-controlled Congress may have done the trick -- even as the trick, as he points out, will be turned a lot later than it did for all of the other major hurricanes that have hit this country in the last 20 years.

Disney (DIS) sure didn't hurt the index with its 32% gain, augmented by fabulous theme-park attendance and remarkably resilient ESPN numbers. Robert Iger, one of my favorite chief execs around, threw some cold water on the company's future after that last quarter, but maybe that's where the opportunity comes in. It can go back to oil highs.

Meanwhile, that fourth-quarter rally in financial stocks gave new life to JPMorgan Chase (JPM), up 32%; American Express (AXP), which rallied 22%; and Travelers (TRV), which vaulted 21%. I don't know if these stocks can maintain that pace. JPMorgan's bounce-back came after that horrid "London Whale" incident -- but I fear that, unless the company is allowed to return gobs of capital to shareholders, it may not be able to repeat that performance. Have you noticed that it always seems to fail right here, seemingly for years?

American Express, for its part, seems a bit tapped out. I much prefer the non-credit-risk MasterCard (MA). Travelers, while a fabulously run company, is not a stock that goes up 21% year after year, and you shouldn't expect it to do so. It's a slow mover in the fast lane.

But you know what could have another great year? How about General Electric (GE), an ActionAlertsPlus name that advanced 17% in 2012 in spite of downbeat chatter at a recent analyst meeting? Here's a worldwide recovery play right in synch with a global recovery for oil and gas exposure, all during a time when that industry could be recovering courtesy of China. Don't forget, this company got the wind-subsidy break that was needed to maintain momentum in an otherwise faltering industry. Will we see dividend boosts galore here? I think so. It was four years ago that we saw a 66% dividend cut in GE. Many other industrial names have restored their returns to halcyon days, but GE has much further to go.

Pfizer (PFE), up 16% for last year, can not only repeat that performance but best it. The giant drug company is taking action to bring out value in its animal-health business, and management does its best to return capital in terms of even higher dividends. Pfizer's payout already amounts to a 3.75% yield -- still terrific, after even these new tax schedules. I like the paint-drying Pfizer; it lets you sleep at night -- and by day, too!

I don't know if Wal-Mart (WMT) can repeat its gain of more than twice that of the Dow, given the run it has had and in light of a weakened U.S. consumer, at least at the start of the year. This stock was a rocket after the revelations of Mexican bribery, vaulting from the $50s to the $70s before it retreated. But I think it, like all retailers, had a subpar holiday season, so now it has to wait for those results before the bar can be reset.

Still, 3M (MMM) and United Technology (UTX) -- up 14% and 12%, respectively, for 2012 -- are naturals to repeat if not do better, given their strong Asian exposure and best-in-class new technologies. Remember, 3M has been held back by a weak China, and United Tech has been living in the shadow of the fiscal cliff's threatened military spending cuts. Both names can only improve from here, although the latter will no doubt be a casualty at various points during the upcoming sequestration debate.

AT&T's (T) 11% gain for last year reminds you that even the most boring of stocks can generate double-digit gains through good dividends, bountiful buybacks and a steady-eddie performance. I think the same gain is in the cards for 2013, except this time the company stands to come from small-business landline improvement, something that could really spur high-margin business.

That brings us to the less-than-stellar Dow performers. Stay tuned.

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