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The best performing stocks in the market are usually the fastest growing stocks or the stocks with the highest expected growth rates. In this article, we will present the 5-year growth rate estimates for the 30 members of the Dow Jones Industrial Average. The source of the data is Thomson Financial. Theoretically, the stocks with the highest growth estimates and lowest PE ratios should outperform the market on the average.

There are two main problems with using these estimates. First, the estimates may not be accurate under the current assumptions about the future. Second, the estimates may be accurate under the current assumptions, but we may experience adverse developments in the future that might render these estimates obsolete.

Rank

Company

Ticker

Forward PE

5-Year Exp. Growth Rate

2011 Return

1

HEWLETT PACKARD

HPQ

7.3

8.9

-0.7%

2

CATERPILLAR INC

CAT

12.8

15.3

14.6%

3

ALCOA INC

AA

11.2

13.2

7.1%

4

INTEL CORP

INTC

9.5

10.8

-3.4%

5

MICROSOFT CORP

MSFT

9.3

9.3

-8.8%

6

CHEVRON CORP NEW

CVX

8.6

8.2

16.2%

7

CISCO SYSTEMS INC

CSCO

10.1

9.4

-13.7%

8

EXXON MOBIL

XOM

10.1

9.3

13.5%

9

AMERICAN EXPRESS

AXP

10.7

9.9

4.7%

10

TRAVELERS

TRV

9.6

8.6

5.3%

11

WAL MART STORES

WMT

10.7

9.3

-2.9%

12

IBM

IBM

11.2

9.6

8.1%

13

GENERAL ELECTRIC

GE

12.3

10.2

7.3%

14

DISNEY WALT CO

DIS

13.9

11.4

10.5%

15

HOME DEPOT INC

HD

13.8

11.0

4.2%

16

JPMORGAN CHASE

JPM

8.1

6.2

7.3%

17

BANK OF AMERICA

BAC

7.6

5.6

4.1%

18

3M CO

MMM

13.1

9.4

5.7%

19

MCDONALDS CORP

MCD

13.7

9.4

-3.0%

20

UNITED TECH.

UTX

13.3

8.6

3.3%

21

KRAFT FOODS INC

KFT

12.5

8.1

-1.5%

22

MERCK

MRK

8.4

5.0

-8.7%

23

PROCTER & GAMBLE

PG

14.1

8.0

-4.6%

24

DU PONT

DD

12.8

7.0

8.4%

25

BOEING CO

BA

13.4

7.2

10.7%

26

COCA COLA

KO

15.0

7.8

-2.7%

27

A T & T INC

T

11.0

5.7

-3.0%

28

VERIZON

VZ

13.4

6.5

4.6%

29

JOHNSON & JOHNSON

JNJ

11.5

5.2

-4.1%

30

PFIZER INC

PFE

8.7

3.1

15.1%

According to Thomson’s estimates, Hewlett Packard is the best Dow stock for the next five years. Bill Miller, Lee Ainslie, David Tepper, Jim Simons, and Leon Cooperman are among the prominent investors with large HPQ holdings.

Intel ranked fourth and Microsoft ranked fifth. It isn’t coincidence that all PC-related Dow components ranked at or near the top. There isn’t enough investor interest in these stocks because of the Apple frenzy. Investors don’t think HPQ, INTC, and MSFT can grow at 8-9% annually for the next five years. That’s why these stocks have low PE ratios.

Several hedge funds don’t agree with the market’s judgment. For example, Microsoft was owned by 161 hedge funds at the end of last year. Barry Rosenstein’s Jana Partners, David Einhorn’s Greenlight Capital, Craig Effron’s Scoggin Capital, and Brevan Howard are some of other hedge funds bullish about Microsoft. David Tepper, Brevan Howard, and Jim Simons are also bullish about INTC. Only time will tell whether Mr. Market is wrong or analysts are too optimistic about these tech giants.



Disclosure: I am long T, MSFT.

Source: The Best Dow Stocks for the Next 5 Years