The Best Dow Stocks For The Next 5 Years

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 |  Includes: AA, AXP, BA, BAC, CAT, CSCO, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MDLZ, MMM, MRK, MSFT, PFE, PG, T, TRV, UTX, VZ, WMT, XOM
by: Insider Monkey

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 Yahoo 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

8.40

31.11

-26.3%

2

JPMORGAN

JPM

8.63

17.61

-24.5%

3

HEWLETT PACKARD

HPQ

4.69

7.82

-45.8%

4

CATERPILLAR

CAT

9.43

12.74

-9%

5

GENERAL ELECTRIC

GE

10.15

12.69

-13.4%

6

INTEL CORP

INTC

9.02

10.87

-0.1%

7

DISNEY

DIS

11.10

12.47

-16.7%

8

MICROSOFT

MSFT

8.62

9.07

5.3%

9

3M CO

MMM

11.63

11.63

-15.9%

10

CISCO

CSCO

8.75

8.50

6.2%

11

AMERICAN EXPRESS

AXP

11.87

11.09

-5.8%

12

IBM

IBM

11.83

10.95

1.4%

13

HOME DEPOT

HD

12.94

11.98

-4.5%

14

UNITED TECH.

UTX

12.38

11.46

-14.1%

15

DU PONT

DD

10.10

8.94

-13.4%

16

BOEING CO

BA

12.15

10.57

-12.6%

17

WAL MART

WMT

10.69

9.14

-0.6%

18

EXXON MOBIL

XOM

8.32

6.26

-8.8%

19

TRAVELERS

TRV

8.43

5.81

-13.8%

20

KRAFT FOODS INC

KFT

13.70

8.73

-1.0%

21

PROCTER & GAMBLE

PG

13.90

8.80

1.2%

22

MCDONALDS

MCD

15.61

9.82

6.0%

23

CHEVRON

CVX

7.36

4.52

-3.2%

24

VERIZON

VZ

14.00

7.49

-1.3%

25

MERCK

MRK

8.46

4.41

-7.5%

26

PFIZER INC

PFE

7.97

3.95

-11.3%

27

COCA COLA

KO

16.47

7.19

5.5%

28

JOHNSON & JOHNSON

JNJ

12.14

5.23

-2.7%

29

A T & T INC

T

11.36

3.57

-7.8%

30

BANK OF AMERICA

BAC

5.61

-3.36

-36.2%

Click to enlarge

According to Yahoo’s estimates, Alcoa Inc. is the best Dow stock for the next five years. Steven Cohen and John Paulson are among the prominent investors with large AA holdings. John Paulson had nearly $431 million invested in AA at the end of June. He is by far the most bullish hedge fund manager about AA.

JPMorgan Chase is the second best Dow stock for the next five years. In the last four quarters, the company's reported EPS exceeded analysts' consensus estimates. Banking stocks are really out-of-favor right now. JPM declined almost 25% this year. This is one of the reasons why it looks so attractive to analysts. Lee Ainslie is probably the most bullish hedge fund manager about JPM. He increased his stake in JOM by 80% during the second quarter.

HPQ ranks third, Intel ranks sixth and Microsoft ranks eighth. 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 (NASDAQ:AAPL) frenzy. Microsoft got a boost from David Einhorn at the Ira Sohn Conference. Since then the stock has been outperformed the market in double digits (read David Einhorn’s speech here).

AA, JPM, HPQ and CAT didn’t perform well so far this year. Investors apparently don’t think they can grow at such high rates annually for the next five years. Recession expectations also played a role in their poor performance because these are cyclical stocks. That’s why these stocks currently have low PE ratios.

Several hedge funds don’t agree with the market’s judgment. For example, Microsoft was owned by 91 hedge funds out of 300+ hedge funds we are tracking. JPM is the fourth popular stock among hedge funds and BAC is the sixth popular stock at the end of June (see the 10 most popular stocks here). We believe that banking stocks as a group are undervalued too, but we also believe that they can get cheaper if Greece defaults and crisis spreads to bigger European countries and French banks.

Disclosure: I am long MSFT, T.