Seeking Alpha
, PDL Capital (132 clicks)
Value, special situations, long-term horizon, small-cap
Profile| Send Message|
( followers)  

Investors look to the Dow as if it is representative of the market when, in fact, it really isn't. Broader indexes are the way to go. That being said, the Dow does contain some of the most widely held stocks and its influence is undeniable. That's all the more reason to take a close look at a few of its components to determine if you should hold any of the names therein.

I see two names that I would not hold in any portfolio at this time. The first is Merck & Co. (NYSE:MRK). The stock has struggled for much of the past decade. The company had to merge with Schering-Plough more as a defense against generics than anything else. Sales growth is only expected to rise 2.6% this year. Earnings are expected to rise about 9%, but share buybacks will account for more than half of that amount. With Obamacare creating further uncertainty, I don't see much place for this stock in even the most conservative of portfolios.

I also don't see the point in owning Hewlett-Packard Company (NYSE:HPQ). The company has been spending tons of cash on share buybacks, which account for most of the earnings increases the stock has been enjoying. But sales growth is like Merck's -- anemic. The company's R&D budget has been declining. Rather than focus on technological innovation, the company seems more interested in financial engineering. The stock has struggled for the past decade as well. Sometimes boring is good, but in this case, I don't know what HP is about anymore.

On the flip side, McDonald's (NYSE:MCD) is the place to be. The company thrived during the recession, as the company's cheap and fast meals were just what struggling people needed to fill their bellies. The company's brilliant move into coffee -- throwing down the gauntlet at Starbuck's (NASDAQ:SBUX) -- was an enormous success. The company remains the premier name is restaurants, has outstanding management, a 3% dividend, terrific use of capital, and continually generates billions in free cash flow every year. It's a winner and deserves a place in a long-term portfolio.

Somehow, Coca-Cola (NYSE:KO) just keeps on chugging. I really thought Coke had reached the furthest reaches of the globe and had no more room for growth. Yet the company marches on. Somehow sales are projected to increase from $35 billion last year to $46 billion this year. A 30% sales increase, after all these years, for Coke? Wow. Earnings are on pace to increase 10% this year and next, without being buttressed to any great extent by buybacks. Add in a 2.9% dividend, and I say Coke is a core holding.

How is this actionable?

Buy Coke and McDonald's. Sell Merck and Hewlett Packard.

Source: 2 Dow Stocks to Avoid and 2 to Obtain