There's room. There's room for the Dow to go above 20,000 without stretching the historic boundaries of what stocks in the index can do.
I noodled over the Dow for most of the weekend, pondering not what happens when the Dow hits 20,000 as seems likely after Friday's performance, but how conceivable is it for the Dow to keep going higher without getting to absurd levels.
Oddly, I found one way of looking at it -- how far stocks would have to go to get back to their all-time highs -- to be very comforting, because there's some real distance between the current prices and where 12 of these stocks would have to go to take out what amounts to fairly recent highs. In other words, many of the Dow stocks have been much higher in less fortuitous circumstances, so investors might have less trepidation with these stocks that are so far from their highs, say, than buying a relentlessly rising Goldman Sachs (GS) or JP Morgan (JPM) , the workhorses of the rally.
I mention "fairly recent" highs for two reasons. One is that the short timeframe from their all-time highs might lower the psychological barrier to how far stocks have to fly without making the whole exercise absurd. And two, because if you go back too far in time too you will find four outliers -- Cisco (CSCO) , Intel (INTC) , Merck (MRK) and Pfizer (PFE) -- which hit ridiculous levels that cannot expect to be repeated any time soon. Just to show you what absurdity looks like, Cisco touched $80 and Intel reached $74 in 2000, while Merck hit $89 and Pfizer got to $49 back in that same period.
So which stocks have to increase the most to get back to their highs and how crazy would it really be? Let's take them in the order that presents the biggest gap, beginning with Walmart (WMT) , which needs to advance 32% to get to where it was two years ago. Frankly, this one might be a tall order, because in that intervening period Amazon (AMZN) has come on so strong that it might be a stretch to expect Walmart to be able to put up the kind of numbers needed to get back to the $90 level where it traded.
It's had a 10% decline in earnings since then, but more important, I think it's going to be very hard for any retailer save Amazon to get an expanded price-to-earnings multiple. Two years ago it sold at more than 17x earnings. Now it's at about 15x. But why would you pay more for a stock when analysts are projecting flat earnings for the next two years? I do not expect Walmart to help the Dow 20,000 cause.
Next up? American Express (AXP) . Back in 2014, American Express hit $96. The current stock would have to advance 28% to get there, which would require no more than multiple expansion because it had relatively the same earnings that it does right now back then.
This one could be the easiest of advances, both because credit losses are down big and because its credit card brethren, Capital One Financial, Discover, Visa (V) and MasterCard (MA) have all had significant rallies. I actually regard this stock as inexpensive and think it can be bought here, now that it has fully absorbed the loss of the Costco (COST) business to Visa and Citigroup (C) .
Third is IBM (IBM) , which will have to mount a 26% advance to get back to its $216 high in 2013. In truth, IBM, like Pfizer, Merck, Cisco and Intel in the days of yore, should not have been as high as $216. Earnings were bumped up by buybacks and the price was hyped by hoopla surrounding Warren Buffet's anointment of the stock, a rare foray into technology for the Oracle of Omaha.
IBM is trying to get to a level where its business is defined by its fast-growing cognitive analysis à la Watson but, like many older technology companies, it has too much legacy business that's keeping it back. Analysts are predicting an up year, $13.50 going to $13.90, but I just don't see it getting a 15 and change price-to-earnings multiple, three multiple turns from its current basis. Some regard it as expensive right here. I can't imagine what they would think above $200.
Nike's (NKE) intriguing. It's got a lot of people buzzing about a trough earnings level after that last quarter and it seems to have stabilized in the low $50s despite those very discouraging department store reports. Here's the issue, though: this company will have to see its stock advance 26% at a time when all we keep hearing is that there will be no expenses when it comes to cost of goods sold overseas that are marketed here, which would be disastrous for Nike's earnings and make it, if anything, one of the biggest losers in the Dow along with Walmart, which would have a similar problem. If we simply just lower the corporate tax rate on Nike, though, and not expect more than that, it could help get the Dow higher. I am just not counting on it closing the gap to $67 from $53.
Caterpillar's (CAT) already told you that it's not doing all that well, which is certainly a negative. But it's worth recalling that the stock was trading at $93 -- exactly where it currently is -- when it preannounced that earnings would not be that good. Now CAT's a strange animal. It is, at once, the company most easily sacrificed if Trump truly wants to start playing as tough with the Chinese as they play with us, but it would also be a huge beneficiary of any sort of gigantic -- and much needed -- infrastructure program in the U.S.
More important, if the world's starting to do better, as it seems, then it might not be a stretch for Caterpillar to trade back to $116 where it was in 2012, although that was at the height of the commodity boom worldwide. I think that CAT's downside is well known, but its upside isn't visible yet. It can creep toward that old level on some positive commodity data and a big cost takeout that we will find more about when it reports on the 26th. Anything super positive about China could work, but Caterpillar's in the crosshairs of both the Communist government and the strong dollar, which can work in arch-rival Komatsu's favor.
Exxon-Mobil (XOM) and Chevron (CVX) need to take on 17% to get back to their highs and, frankly, that's just asking too much from both of these stocks. As it is, they have had a remarkable comeback from their lows at this time last year and both companies have shown an ability to be able to cut back rather quickly, given how huge they are, and also be able to pay their dividends without any issues -- and they have big dividends. You can't look at either of these two to get us to Dow 20,000. If anything, the longer oil stays here, the less likely these two can stay where they are without risk of pullbacks.
Can Coca-Cola (KO) mount a run? That 3.3% yield isn't all that appealing when you consider that the 10-year gives you 2.5%. There's a new CEO coming in and I think that the restructuring that Muhtar Kent has designed will make Coca-Cola have no problems meeting the numbers. The simple truth is, though, that this stock just can't be relied to pick up 14% to get back to that high, unless this market loses its animal spirits -- something that, while possible, will make it so Dow 20,000's a moot point anyway.
Apple's (AAPL) so logical to gallop here. It's got to advance a little more than 13% and it is right at a break-out level -- $0.40 to go. However, we keep hearing that there are already cutbacks on the iPhone 7 production and only the super-bulls think that's because the company is trying to set up for a huge iPhone 8 cycle.
I am concerned that the company has not augmented its service revenue stream and can't really understand why it doesn't use its cash hoard to make some acquisitions that further it. In the meantime, the company would be a huge beneficiary of repatriation -- $40 per share is overseas and that would spur tons of debate about even bigger buybacks and dividends. At 13x earnings, the stock's a bargain, but you have to ask, hasn't it been a bargain for a full year now?
That last quarter from Cisco was a downer, especially in light of all of the strength we are seeing in optical across the board including Juniper (JNPR) , Ciena (CIEN) and Finisar (FNSR) . Cisco has to find some way to make it clear that the legacy business isn't hurting it as it transitions to more of a cloud-based system. But let's be candid, you buy Cisco -- which the trust, Action Alerts PLUS, owns -- because it yields 3.3% and because it has $60 billion in cash overseas. Still, I don't think it can advance 13% back to its recent high based on either of those. It will take a good quarter first, and that's not until Feb. 15.
It's ironic, but the last two stocks that are more than 10% away from their highs are two that have given her all she's got: Disney (DIS) and United Technologies (UTX) . They need to rally 12% and 10% respectively to get back to their all-time highs.
The whole narrative of Disney has changed to the point where it seems like a huge mistake to sell, given that Bob Iger has created tremendous optionality with ESPN despite the decline in subscriptions, some would say the precipitous decline. I think it's what we would call an "up" stock, because of terrific theme park attendance and movies, not to mention a potential corporate tax cut of some magnitude. I can't believe how this stock was able to run from $93 to $109 basically on the strength of Iger saying he feels better about ESPN. But that's just what happened.
United Technologies? It's going to have a tough time gaining traction from here, because it's had a magnificent run even though numbers haven't gone higher. If anything, they've come down! I don't see it climbing to its old high of $123 any time soon. That's 10% too far.
Yep, there's a dozen stocks that need to advance more than 10% just to get back to their old highs, and only in a few cases do I see it happening. Still, the comforting fact that they've been there could come into play if they do start or continue to advance.
One thing's for certain, though: if these stocks have been to higher levels that weren't considered all that lofty once, with just a handful of exceptions, then you have to think, in this better environment for almost all of them, they can do it again.
