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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

ALCOA INC

AA

9.7

16.5

-0.3%

2

CATERPILLAR INC

CAT

10.7

16.4

7.9%

3

HEWLETT PACKARD

HPQ

6.5

8.6

-16.1%

4

INTEL CORP

INTC

9.0

11.2

3.4%

5

MICROSOFT CORP

MSFT

8.7

9.6

-10.6%

6

GENERAL ELECTRIC

GE

11.1

11.9

3.0%

7

CISCO SYSTEMS INC

CSCO

8.7

9.3

-23.8%

8

JPMORGAN CHASE

JPM

7.2

7.6

-3.4%

9

DISNEY WALT CO

DIS

12.7

12.8

2.1%

10

IBM

IBM

11.1

10.1

13.8%

11

AMERICAN EXPRESS

AXP

11.7

10.4

17.1%

12

WAL MART STORES

WMT

10.8

9.4

-0.4%

13

HOME DEPOT INC

HD

12.9

11.3

1.1%

14

BANK OF AMERICA

BAC

6.2

5.2

-19.0%

15

3M CO

MMM

12.9

10.6

8.8%

16

TRAVELERS COMPANIES

TRV

9.5

7.7

4.2%

17

DU PONT

DD

11.3

8.9

4.4%

18

EXXON MOBIL

XOM

8.7

6.2

10.4%

19

UNITED TECHNOLOGIES

UTX

13.7

9.4

9.7%

20

BOEING CO

BA

14.2

9.1

11.7%

21

KRAFT FOODS INC

KFT

13.8

8.7

11.0%

22

MCDONALDS CORP

MCD

14.6

9.2

9.4%

23

PROCTER & GAMBLE

PG

15.1

8.3

1.2%

24

COCA COLA CO

KO

15.3

8.3

2.4%

25

VERIZON

VZ

13.5

7.3

3.1%

26

JOHNSON & JOHNSON

JNJ

12.5

6.1

8.7%

27

MERCK & CO INC

MRK

9.1

4.1

0.7%

28

PFIZER INC

PFE

8.9

2.8

18.2%

29

A T & T INC

T

12.0

3.6

8.2%

30

CHEVRON CORP

CVX

7.7

1.6

12.5%

According to Thomson's estimates, Alcoa and Caterpillar are the best Dow stocks for the next five years mostly because they are expected to grow at a very high rate. John Paulson had nearly $500 Million in Alcoa at the end of March. He is by far the most bullish hedge fund manager about AA (See John Paulson's other bullish bets here).

Four of the next five stocks are old technology companies: Hewlett Packard, Intel, Microsoft, and Cisco. 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 9-11% 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. Microsoft was owned by 54 hedge funds as a top 10 holding at the end of March. Hedge funds collectively own 2% of the outstanding shares. Jim Simons' Renaissance, David Tepper's Appaloosa, Leon Cooperman's Omega Advisors, and Tom Steyer's Farallon are some of the hedge funds that are bullish about Microsoft. Twenty hedge funds had HPQ among their top 10 holdings. Hedge funds collectively own 4% of the outstanding shares. The stock lost 12% so far this year. John Paulson's Paulson & Co, David Tepper's Appaloosa and Bill Miller's Legg Mason had the largest stake in HPQ among the 300+ funds we are following (Check out David Tepper's favorite holdings here).

At the bottom of the list we have telecom companies and pharmaceuticals. Analysts think that telecom companies can grow barely above the inflation. AT&T is expected to grow by 3.6% per year for the next five years. The estimated growth rates for JNJ, MRK, and PFE are also between 2.8% and 6.1%. Bill Miller has more than $100 in each of these three pharma giants (See Bill Miller's top stock picks).

Interestingly the top 15 stocks Wall Street analysts like the most lost 1.1% so far in 2011. The 15 stocks that are at the bottom of the list gained 7.7% in 2011. Clearly investors don't agree with analysts at the moment. We think extreme optimism and extreme pessimism tend to be wrong on the average. That's why we like the top 5 stocks which are disliked by investors and the bottom 5 stocks which are disliked by Wall Street analysts.

Source: The Best Dow Stocks for the Next 5 Years