Ranking The Dow Jones Components: More Long Ideas

Includes: BA, CSCO, HD, JNJ, MRK, UTX
by: Benjamin Goldman

Over the last couple of months, I have been experimenting with a ranking algorithm designed to predict fluctuations in stock price. To read about the ranking algorithm itself, please read my Instablog post. At the market close on September 16, I executed my ranking algorithm on the Dow Jones industrial average components, and it returned a 1 through 30 ranking along with a potential portfolio for an investor wanting to hold only long positions. In this article, I list the stocks ranked from 7 to 12 and give a brief analysis of each stock. Read about the top 6 stocks to buy in the first article in this series.

Other Long Considerations

7. The Home Depot, Inc. (NYSE:HD)

The Home Depot, along with its competitor Lowe’s (NYSE:LOW), had surprisingly high earnings last quarter considering consumer confidence was at a 30-year low. Home Depot can be considered to be a “lost decade” stock, since shares traded around an adjusted $50 in early 2002 and trade at $34.61 as of September 16. However, Home Depot has been able to consistently increase its quarterly dividend from $0.05 in 2002 to $0.25 in 2011. This suggests that Home Depot shares dropped in 2002 because they were overvalued, and the company in itself is healthy and can continue to grow at a steady rate. The Home Depot is yet another stock in the DJIA that investors can earn a steady income stream from and expect a lot of growth after a disappointing decade.

7. United Technologies Corporation (NYSE:UTX)

United Technologies shares peaked at $91.83 in early July and are now trading at $75.50, dropping in early August to $67.12 per share. This large drop happened despite the company raising its 2011 guidance on July 20 and then reaffirming its 2011 guidance on September 6. The ranking algorithm gave United Technologies a good rating because there is a lot of space for shares to recover and very few signs that shares will continue to drop. In addition, United Technologies is expected to have substantial earnings growth for such a developed company. With earnings per share of $4.74 in 2010, analysts expect an EPS increase of 15.2 percent in 2011 and another increase of 12.5 percent in 2012. With a P/E ratio of 14.6 and very few negative outlooks of the company, United Technologies seems like a good buy right now.

9. Boeing Company (NYSE:BA)

Boeing is usually a difficult stock to value because so much of its price depends on its future developments. However, Boeing has been a good stock to buy in the long term. Shares did drop a lot from late 2007 to early 2009, but Boeing’s quarterly dividends increased from $0.35 to $0.42 over this time. Even though Boeing’s dividend has remained the same since 2009, investors can expect this dividend to increase soon. When this raise occurs, it will be a good time to hold Boeing stock, as share prices can potentially return to over $100 per share.

9. Cisco Systems (NASDAQ:CSCO)

Cisco Systems, which began paying dividends this year, is one of the “lost decade” tech stocks and has experienced quite a selloff over the past year. However, shares have begun to bounce back over the last month and appear to be bullish as Cisco’s short ratio is tied with Caterpillar (NYSE:CAT) as the fourth-lowest in the DJIA. Although some believe that shares will continue to disappoint, bulls are beginning to back Cisco Systems stock, and if dividend rates improve and Cisco shows that it dominates its market, this may be a good stock to buy.

11. Merck & Company (NYSE:MRK)

Right now, I believe that the health care industry as a whole is a tough industry to invest in. Merck is one of the better health care buys, as it has a strong reputation and a strong dividend yield at 4.65 percent. Although its P/E ratio of 23.67 appears high, its 2011 adjusted earnings per share are expected to be $3.73, which makes Merck a value stock. Although Merck shares tend to have major selloffs at times, it is a good stock to buy right now since indicators do not show a potential for a big drop in price.

12. Johnson & Johnson (NYSE:JNJ)

Johnson & Johnson is yet another component of the DJIA that has consistently growing dividends and a strong future outlook. Although not completely immune to price fluctuations in the market, its beta of 0.58 is very low and its dividend increase from 46 cents in Q1 2009 to 57 cents in 2011 shows that this company is not done growing. Johnson & Johnson is a true blue chip stock. One can expect stability in price and consistent, growing dividends, but do not expect to become a millionaire from buying JNJ.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.