(Read Part 1 of the my Dow components analysis here.)
11. Johnson & Johnson's (JNJ) one of those stocks that has a huge strong dollar problem, as 56% of its sales come from overseas. It also needs to come up with some new breakthrough drugs to keep its current multiple of 17x, higher than the rest of the majors, going higher still. Alex Gorsky's been hinting that he has some big drugs in the pipe, so I am not all that concerned on that score. I also believe that JNJ's going to announce a monster buyback and perhaps a big boost in the dividend -- it sure has the cash -- and that could take its yield nicely above the current 2.68% level. Will people look through the somewhat obvious strong dollar guide-down vs. high expectations on revenues and earnings? I sure hope so, as the Charitable Trust owns it. I think an 18.5x multiple on a $6.10 estimate could yield $113, a decent increase vs. the current $104 price. A 9% gain could be considered disappointing vs. last year's 14% increase, but it's better than I expect from the shares of most of the drug companies. $104-$113
12. Can DuPont (DD) do more than its currently delivering under CEO Ellen Kullman? Nelson Peltz sure thinks so and the canny activist always seems to have an eye on companies with stocks that are doing well that he thinks could do even better. Its just-announced spinoff of Chemours, its performance chemical business, will give shareholders a nice one-time dividend. But more importantly, the spin should enhance DuPont's 18x price-to-earnings multiple to even higher levels because Chemours will include DuPont's notoriously volatile titanium dioxide pigment division, which has always played havoc with the company's earnings stream. Will it be enough to satisfy Peltz? I don't think so and I believe he wants a seat at the table that will be gained in a proxy fight. A Peltz-led proxy battle could be a propellant here, even beyond the jettisoning of a commodity business that will make DuPont an even more proprietary chemical company based on in-house developed enzymes. It wouldn't shock me to see DuPont's multiple eventually get up to the elevated 24x number of PPG (PPG), which similarly shed its Ti02 business not that long ago. That would produce a 26% gain to about $92, which would, again, make DuPont one of the best performers in the Dow in 2015. I think the changes and the proxy fight will be terrific news for shareholders, even as Kullman will have to battle every minute unless she accedes to a board seat. I think it's worth it to placate Peltz because he's typically got some good ideas about how to enhance value, even when there's been a ton of improvement already. Another Dow winner. $73-$92.
13. How did Merck (MRK) put up a 13% increase over 2013? I think the buyback helped immensely, but the big dividend that gave you a 3.3% return when it was at a lower price sure helped. In fact, it served as a safety net all year. I didn't care for Merck's recent $8.4 billion acquisition of Cubist Pharma, but that's only in hindsight given that immediately after the announcement of the merger, Cubist lost a huge amount of exclusivity on its No. 1 drug, Cubicin, to a patent challenge by Hospira. You have to wonder what Merck's $102 bid would have looked like if it would have just waited one day to see how the litigation turned out. Boy did it guess wrong on that outcome, because I think that it could have paid half of the premium it did off of what was then a $75 stock and still have gotten that company. All that said, Cubist is hard at work at curing some superbugs that could be a gigantic new line item for Merck, given the sheer numbers of deaths caused by illnesses caused simply by being in a hospital. This acquisition, even if it was costly -- and it was -- plus the possibility of a new, not-talked-about Alzheimer's drug that substantially reduced the amount of plaque in the brain, could propel Merck dramatically higher in 2015, much higher than that 13% increase of 2014. I don't know if the good news will be contained in the earnings for 2015, but 2016 could be blockbuster, which means the market will begin to discount that up front by year's end, putting on a couple of multiple points off that bigger out-year number, something that could yield a $72 target, well above Merck's current $57 price, a 26% gain. Too big? I don't think so, given how the market values new drugs with sizable markets. Look for a spin-out, if not an outright sale of its animal health division, too. Seems like a reasonable assumption given the success of Pfizer (PFE) spinoff Zoetis. $57-$72
14. Is Procter & Gamble (PG) going to be able to continue its paring of weaker brands, something which, when matched by a small increase in organic growth, propelled the company's shares to an 11% gain? I think CEO A.G. Lafley continues to shuffle the deck that he dealt himself, while a big dividend boost from the proceeds will allow him to take the yield above 3% if its stays here, which seems highly unlikely given the endless search for safe bond market equivalents. I don't think $100 is unreasonable, given how much stock can be bought back and how much more the dividend can be boosted. I think there will be a continued jettisoning of the weaker brands, which allows Procter to pour more money into the stronger ones. PG may be a hidden beneficiary of lower energy prices. Lord knows, the company's a big user with everything from surfactants to plastic bottles to gasoline needed to bring products to customers. But it does best with a weak currency and we have the dollar going to five-year highs vs. the euro and I don't know a soul who thinks it stops there, including me. So, those could cancel out each other. Still, who can be unhappy with another 10-11% on top of last year's performance? P&G is still a buy. $90 -$100
15. I still can't believe that Goldman Sachs (GS) can trade at such a discount to even the everyday banks, as it is hardly an everyday entity. I also can't believe that the stock is only about 1.1x book when we know that book, after the Great Recession and financial reform and a very tough Fed, is pretty much cash on hand for these guys. I also think the nostalgia for the days when Goldman Sachs could blow earnings out on trading gains shouldn't be mourned over. Consistent fee-based earnings is what Goldman Sachs can give you now, especially in these days of very strong mergers and acquisitions, a trend I expect to accelerate in another year where many companies will be starved for growth. That's why I think the absurdity of Goldman meriting only an 11x price-to-earnings multiple on $17.20 in estimated earnings will be put to rest in 2015. How about a 13x multiple on $19 earnings? I think that's more like it. That's how this $194 stock gets to $247, a roughly 27% gain. Too huge? I doubt it, as that would still produce a multiple to book that's too low to be justified. Look for an even more aggressive buyback than the 16 million shares that were retired in the last 12 months, taking share count down to 455 million from 471 million, because the feds aren't going to be caring as much about these kinds of matters as they were in the waning days of the Great Recession. $194-$247.
16. Can Wal-Mart (WMT) repeat its 9% gain of last year? Why not? It's 71% domestic and while that means it can't do as well as its 100% domestic brethren, it's capable of some real improvement under new CEO Doug McMillon. I like this guy enough to consider calling him Doug McMillions because I suspect he could add hundreds of millions of dollars in sales simply because he has recognized that his company's been woeful at generating new customer visits on anything other than price. That's going to change in 2015 ... for the better. Plus, his aggressive build-out of small format stores could become a needle mover and the big earnings disappointments, which have so often plagued this company, could be a thing of the past owing to more realistic estimates and a healthier consumer. How can a place that sees 100 million customers a week not do better if those 100 million are paying half of what they paid at the pump or in their heating bill year over year? I could see Wal-Mart's stock increasing 17% in 2015 on scarcity value -- the need to find high-quality domestic retail stocks that haven't run too much already -- as well as lower gasoline prices. You could surely do worse than owning a big-capitalization retailer in 2015. It's possible that the Street's $5.00 estimate could be 10% too low and a 17x multiple expands to an 18x figure. Call it an even $100 by year's end. $85- $100.
17. Now we get into the problematic world of those stocks that only increased by mid-single digits, starting with JPMorgan Chase (JMP), which rallied 7% last year. I know Morgan will be able to buy back more shares than the bad old days and a dividend boost of a decent magnitude is a given, taking the yield higher than 2.56% if the stock does nothing. But I think it will only do next to nothing because I do not believe that 2015 is going to produce the kind of yield curve or Federal Reserve rate increase that will matter much to the bank. There's too much worldwide slack and too little inflation to merit any sort of meaningful fed funds rate boost. I don't even know if JPM will be able to do the $5.54 estimate with these low rates, but I will give it the benefit of the doubt and bet that it gets a 12x on that just-OK number. That gives you just about $66 on a $62 stock. What can I say? Wait until next year when we get that rate increase that will matter? When we get to a 3% 10-year instead of the sub-2% I expect? Probably. You need some super growth, maybe plus-4%, to get the kind of loan demand that will let us overlook a not-so-hot net interest margin and I don't think we will get that kind of robust GDP number. Plus, after CEO Jamie Dimon's recent bout with throat cancer we will probably have to deal with succession talk all year, which is something that suppresses any multiple. Get ready for a 6% increase in shareholder value, even lower than last year. $62-$66.
18. Last year wasn't American Express' (AXP) year as its stock only increased 2%. The setup's much better in 2015. The American consumer's got too much going for her with these low fuel prices. I also like the prospective increase in travel and leisure as well as the possibility -- at last -- of consistent small business creation, all needle-movers for the credit card concern. I believe that American Express could have a very big year indeed. How big? How about $6 big, 10% more than people are looking for, coupled with the possibility that this financial gets the premium it always sported before the Great Recession knocked it off its pedestal. A price-to-earnings multiple of 19x, up from the current 16x-and-change multiple on 2015 estimates seems within reach. That's how a $93 stocks goes to $114, a 22% advance. I think this one will prove to be one of the most positive surprises in the Dow and why it remains a big position in my Charitable Trust. $93 to $114.
19. Can Coca-Cola (KO) ever get it together under CEO Muhtar Kent? Probably not, which means it might be time for him to go. The disparity between the flat growth of Coca-Cola and the high-single-digit increase of rival PepsiCo (PEP) is just too glaring for the board of directors to ignore. While Kent continues to receive Warren Buffett's tepid support, I can't believe the board doesn't see this company's earnings atrophying right in its face. What can save Kent's job? For months now I have been saying that only the prospective acquisitions of both Keurig Green Mountain (GMCR) and Monster Beverage (MNST) -- Coke's got big stakes in both -- can keep Kent in the driver's seat.
So, I think there's several ways to win here. You get a changing of the guard at the top and people will be more willing to buy Coca-Cola's stock. Or you get even one of those two acquisitions and you get some genuine sales growth excitement, something that's been missing here for years now. Under either option you get a nice bump in the stock. If Kent stays and we get no acquisitions, this one stays ensconced in the low-$40s buoyed only by the 3% yield. I am being paid the big bucks not to waffle, but to say that one of the options will be the outcome here. I'm betting that either Kent's out or the acquisitions are in and that's why I see Coca-Cola going to $50 in 2015, which would make this $42 stock worth owning. Who wouldn't want to own a stock that rallies 18% plus a 3% yield? Will the board see the pressing need for regime change? They haven't yet, but the eyesore of a Kent without some acquisitions is pretty obvious, even to these guys. $42-$50.
20. Can Pfizer (PFE) continue to do nothing for shareholders beyond a 1.7% gain like it generated last year? Sure it can. In fact, it seems in the cards, as this old dog can't do any new tricks. I bet the only increase you see here is of the bond market equivalent variety, with its 3.5% yield managing to take it up a couple of bucks and no more. Pfizer can go back to its 52-week high of $33, but I can't expect more than that without something blockbuster in the hopper and I just don't see anything like that in the pipe. Do you want to own a stock that advances a point and a half over a 365 day period? I don't think so. I would take either JNJ or MRK over this one, or both. There's just not enough in Pfizer to make me want to own the stock of Pfizer. $31-$33