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. (Data Source: Yahoo Finance)
Theoretically, the stocks with the highest growth estimates and lowest P/E 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 P/E | 5-Year Expected Growth Rate | YTD Return |
1 | ALCOA INC | 7.26 | 34.57 | -41.95% | |
2 | CATERPILLAR | 8.35 | 17.77 | -21.94% | |
3 | HEWLETT-PACKARD | 5.01 | 8.35 | -45.57% | |
4 | JPMORGAN CHASE | 5.82 | 8.56 | -29.07% | |
5 | GENERAL ELECTRIC | 9.66 | 13.42 | -16.70% | |
6 | INTEL CORP | 8.85 | 11.20 | 4.43% | |
7 | DISNEY | 10.83 | 13.71 | -21.05% | |
8 | MICROSOFT | 8.27 | 9.51 | -7.72% | |
9 | 3M CO | 10.84 | 12.32 | -15.47% | |
10 | CISCO | 8.60 | 8.87 | -23.10% | |
11 | DU PONT | 9.16 | 9.44 | -17.63% | |
12 | HOME DEPOT | 12.25 | 12.37 | -6.02% | |
13 | UNITED TECH. | 11.52 | 11.52 | -10.44% | |
14 | AMERICAN EXPRESS | 10.46 | 10.36 | 1.24% | |
15 | BOEING CO | 11.51 | 11.07 | -9.34% | |
16 | IBM | 11.98 | 10.89 | 20.01% | |
17 | WAL-MART STORES | 10.77 | 9.28 | -1.05% | |
18 | EXXON MOBIL | 8.46 | 6.61 | -0.59% | |
19 | TRAVELERS | 8.30 | 5.85 | -12.01% | |
20 | KRAFT | KFT | 13.05 | 8.76 | 6.48% |
21 | CHEVRON | 7.24 | 4.64 | 1.84% | |
22 | VERIZON | 13.81 | 8.42 | 3.88% | |
23 | MCDONALD'S | 15.03 | 9.05 | 15.45% | |
24 | PROCTER & GAMBLE | 13.80 | 8.26 | 0.19% | |
25 | MERCK | 8.19 | 4.40 | -9.97% | |
26 | COCA-COLA | 15.38 | 7.25 | 2.16% | |
27 | JOHNSON & JOHNSON | 11.79 | 5.26 | 1.62% | |
28 | PFIZER INC | 7.85 | 3.43 | 2.63% | |
29 | AT&T INC | 11.15 | 3.56 | -0.46% | |
30 | BANK OF AMERICA | 4.81 | -3.10 | -59.29% |
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 in AA at the end of June. He is by far the most bullish hedge fund manager about AA.
Caterpillar Inc is the second best Dow stock for the next five years. Ken Fisher had the largest holdings of $480 million in CAT at the end of June. D.E Shaw held $320 million in CAT and doubled his holding during the second quarter. Ken Griffin and Steven Cohen also increased their holdings in CAT. George Soros and Ray Dalio are also bullish about CAT and initiated brand new positions in CAT 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 frenzy. Microsoft got a boost from David Einhorn at the Ira Sohn Conference. Since then, the stock has been outperformed the market by double0digits (read Einhorn’s speech).
JPMorgan Chase ranks fourth. 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 22% 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 JPM by 80% during the second quarter.
AA, CAT, HPQ and JPM didn’t perform well so far this year. Investors 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 P/E ratios.
Several hedge funds disagree 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-most-popular stock among hedge funds and BAC is the sixth-most-popular stock at the end of June (see the 10 most popular stocks). We believe banking stocks as a group are undervalued, 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.
