Dissecting the Dow's Underperformance -- Part II

 | Jan 03, 2013 | 10:00 AM EST  | Comments
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Note: This is a two-part piece. Please refer here for Part I.

Now that we've taken care of the Dow's solid gainers, we turn to the stocks that contributed to the index's severe 2012 underperformance -- or, at least, did not help any.

I'll start with Cisco (CSCO), which only beat the Dow by a percentage point. But this stock, for all its flaws, can't be faulted for bringing down the average of the averages. Capital spending should come back for the company, and the stock certainly is cheap. I just can't see it returning to the days of yore -- but another 8% gain for 2013? It can do that, especially since carrier spend is expected to pick up this year, at least according to AT&T (T). You have to wonder if Sprint's (S) newfound war chest won't funnel money to the Internet backbone, too. It does seem to have won the wars against Juniper (JNPR) and Hewlett-Packard (HPQ) for networking equipment.

Separately, what's with Merck (MRK) going only 8.6% higher for the year, far behind an inferior Pfizer (PFE)? The pipeline needs improvement here, or we will only see a high-single-digit gain for 2013. Merck will remain the order of the day, if not the year, until we hear about something that could produce multiple billions of dollars in the outyears -- and I currently don't see anything like that on the horizon.

Verizon (VZ) didn't help Dow's cause, either, having advanced about as much as the index did in 2012. It should play catch-up with AT&T, which itself played catch-up with Verizon this year, in that endless seesaw between the two. I think Verizon was hurt by the possibility that it would lose its bond-equivalent status because of a change in the dividend rules toward higher taxes. This is something that dinged AT&T, as well. At least that worry is over with. I also think its sales of Apple (AAPL) iPhones will remain robust, even as that remains an outlier, controversial call.

As for UnitedHealth (UNH), it's been kept back not by Obamacare or whatever we are calling it now, but because of a lack of small-business formation, coupled with cutthroat pricing. I think both will improve this year, and will allow the stock to be a help to the Dow, instead of the hindrance that its 7% gain constituted in 2012. The stock does tend to swing in the Washington breeze, though, and that's not going to change this year.

That brings me to the cellar-dwellers.

Johnson & Johnson's (JNJ) 2012 gain of 6.9% will prove to be intolerable to its new CEO, Alex Gorsky. I think 2013 is the year he'll take matters into his own hands and split up the company to bring out value; a double-digit gain awaits. This is one of my favorite Dow stocks, simply because of the potential to see value unlocked pretty instantly.

IBM (IBM) needs to show that it's not falling prey to Accenture's (ACN) letdown, and is more of an SAP-like performer. I think it's too cheap and can easily double its 4.2% increase. That last quarter truly stank up the joint, but expectations have now been lowered -- and let's not forget that Accenture is almost back to where it was before the so-called horrid quarter and miserable guidance. The fact that Coca-Cola (KO) only gained 3.6% for the year, as well, just cuts to how cheap these big international stocks are. A weaker dollar and a return to a more robust Europe and Asia could mean a doubling of that performance, which is why my Action Alerts Plus charitable trust wants to aggressively sink its teeth into IBM if the shares stay down here.

Wednesday's strong performance seems more like the new norm than the old aberration. While Microsoft (MSFT) is hard to love, given that its earnings power is based on sales of personal computers, its 2.9% rise in 2012 seems a little stingy, given its new product cycle. I think the stock can return to the low $30s from the current $27 area; if not, I suspect this will be the year of management and reorganization. In all, the techs in the Dow are so yesteryear. Where's Oracle (ORCL) when you need it?

Moving on, can you believe that Boeing (BA) shares did next to nothing last year -- up just 2.7% -- despite a new product cycle in the Dreamliner series? Worst shall not be first, but a tripling of that gain this year could be reasonable. I expect a terrific fourth quarter here, the first solid report of many, and had hoped the stock would give up some of last quarter's gains so my portfolio could pick some up on the cheap.

The oils in the Dow -- they were huge drags in the last 12 months. Exxon Mobil (XOM) rallied only 2.1%, if you can call that a rally, and Chevron (CVX) was up a meager 1.6%. Worldwide growth will make those much better plays, with Chevron getting the edge for certain. That's why my Action Alerts Plus trust keeps buying it. Chevron has got much better production growth, but the overall group traded in lockstep last year, in part because of the commodity and in part because of the oil ETFs. Look for some separation as Exxon falls further behind the curve and as Chevron's stock catches up with its production growth, the true metric to watch with these oil behemoths.

Can Alcoa (AA) repeat its miserable 2012 performance, which saw the stock rise less than 1%? Frankly, I simply don't believe it can stay this low in a worldwide growth environment. It will be helped only by the hideous expectations it has set for itself. A very low bar made of aluminum does keep it from advancing -- because the glut here, unlike the glut in most commodities, is showing no sign of ending.

You want the best dog in the kennel? Then buy Caterpillar (CAT) -- which, after Wednesday's sterling performance, everyone else seems to understand is undervalued. The best China play in the Dow lost 1.1% last year after the company had to revise its bullish forecast downward. My trust is betting that this one could go up at least 10% before it even begins to get fairly valued. However, the U.S. and Europe are going to have to help out China to get it there.

But how about DuPont (DD), which fell 1.7% in 2012? This stock is cheap. But unless this quarter gives us re-accelerated growth, it will only repeat as a poor performer. Recharged growth could be impossible, by the way, given the company's dependence on commodity chemicals, even after that alleged transformation. It's time to let some go.

That, at last, brings us to the Dow tragedies -- McDonald's (MCD), off 12% for the year; Intel (INTC), down 15%; and Hewlett-Packard, off 44%. That last one was really a rotten egg for the index.

Sure, McDonald's can recover some, but maybe not all. It does feel as if the magic's gone, that the innovation is a thing of the past and that management isn't recognizing the daunting tasks ahead. Wednesday's fine start for the stock could easily reverse itself. A weak dollar seems like the only tailwind.

Intel? We all know what's bad. How about what's good? The balance sheet, the leverage to the worldwide economy and a new CEO. Let's just say I don't expect it to lose money, and that would be a nice improvement.

That leaves Hewlett-Packard. This one put a suicide vest on and almost took the whole Dow down with it as the stock took its 44% loss. I don't expect a hideous repeat. However, I still expect it can't help the averages unless it is kicked out of them entirely -- certainly a possibility.

The bottom line: The dogs will be dogs, except Caterpillar, and the thoroughbreds are still worth betting on, even after these terrific runs. Either way I think that, despite the seesaw beginning to the year, courtesy of the shenanigans in Washington, the Dow should catch up to the others in 2013.

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