The Dow Jones Industrial Index made several changes last year, and I think they were changes for the better, as the companies that were added were more representative of the American economy. This year, I think more changes should be made, and the three stocks I think should be removed are also the ones I think investors should sell. Mind you, with the Fed still engaging in quantitative easing, investors may keep bailing on bonds as they seek yield further out on the risk curve. That's but one reason why the Dow did so well in 2013, and may continue to do well in 2014. Thus, calling to sell certain stocks is dicey in this environment. However, these three companies are in trouble anyway.
International Business Machines (NYSE:IBM) is, I'm sorry to say, now an irrelevant company. When people think of tech companies, they now think about Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN). IBM just isn't the company investors think of as being innovative. There's a certain safety in being thought of as stodgy, because that often also is synonymous with "reliable". Now, businesses don't think of IBM to provide servers or data centers. They just make those themselves. These functions are becoming commoditized. EPS is expected to increase 8% in 2014, with 10% long term growth. Even at a P/E of 10.5, IBM is a sell.
You'd think that big pharma is also a safe bet for the long haul, but I haven't seen much excitement out of Merck (NYSE:MRK) in ages. In October, Merck's Q3 numbers were awful, with a 35% decline in earnings. The company is talking about selling various units, which is never a good sign, even though some investors think this means the company can concentrate on its "core business". The truth is that nobody is quite sure what Obamacare will do to the company, it has ongoing competition from the generic drug makers when drugs go off-patent, it's taking a long time to get new products to market, and the company is cutting 20% of its workers. This is a company on the decline. Earning are expected to fall 1% in 2014, long-term EPS growth is set at only 2%, and yet the stock trades at 14x earnings. The 3.5% yield can't look attractive with those growth numbers.
I feel the same way about Pfizer (NYSE:PFE). 5% EPS growth next year, and 2% long term growth? Yeah, it's got $10 billion in net cash, but that's only $1.30 per share. There's no way the 3.4% yield can justify the 14x PE. Yes, it has well over $10 billion in FCF every year, and that cash-generation is something that's great about this legendary company. But it isn't growing, and we pay for growth. It just isn't doing anything anymore, and I think investors will wise up and sell.