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Recipe for a Dow 15,000
Its not as far-fetched as it sounds. Heres what needs to happen -- on the economy, to P/E multiples, interest rates and to the U.S. dollar -- for this big-cap index to reach dizzying heights.
By Jon D. Markman
Now that the Dow Jones Industrials Average is bumping up against the big 10,000 mark again, is it crazy to think that it will climb to 15,000 in our lifetimes?
An advance of that magnitude might actually be less nuts than you would think. In fact, its happened twice in the last 13 years. And neither of those times, strangely enough, were the periods associated with the turn-of-the-century tech-stock bubble.
All that has to happen, if you think about it, is this: The 30 big-company stocks that make up the Dow Jones Industrials Average ($INDU) -- household names like Procter & Gamble (PG, news, msgs) and Coca-Cola (KO, news, msgs) -- have to go up an average of 50%.
That shouldnt be too hard as long as a few things go right and no major things go wrong. After all, a fifth of the 500 stocks in the S&P 500 Index ($INX), another major benchmark of market performance, have gone up at least 50% in 2003 alone.
To be sure, only five stocks in the Dow Jones Industrials have gone up 50% in that time: Intel (INTC, news, msgs), +118%; Caterpillar (CAT, news, msgs), +62%; McDonalds (MCD, news, msgs), +57%; Home Depot (HD, news, msgs), +56%; and J.P. Morgan & Chase (JPM, news, msgs), +53%. But no one said that it has to happen in a year.
What would it really take?
Give the Dow three or four years in a decent global economy free from nuclear annihilation and powered by the explosive growth of the Indian and Chinese middle class, as well as renewed job growth in the United States -- none of which is a slam dunk, by the way -- and the 15,000 level could be breached by the end of the next presidential election in 2008. That would require an average of only 8.5% advances per year, a figure that could be reached with gains, for instance, of 8% next year, 5% in 2005, -2% in 2006, 23% in 2007 and 10% in 2008.
The world may be a lot smoggier then, if millions of Asian families emigrating to cities decide they must drive cars as much as North Americans. But perhaps a focused effort to design and build non-polluting modes of transportation could be one of the new industries that powers the next leg of payroll growth in the United States.
For some perspective, lets do a quick rewind to the last two times the market benchmark has gone up by 50% before retreating: January 1990 to April 1995 and January 1997 to January 1999.- In 1990-1995, the country suffered through a recession, the Gulf War and a jobless recovery, and the Dow still managed to post killer numbers in a relatively short amount of time. In case you werent paying attention to stocks back then, heres what some of the leading components of the index did: Coca-Cola advanced 224%, Citigroup (C, news, msgs) advanced 183%, McDonalds advanced 116%, Eastman Kodak (EK, news, msgs) advanced 92%, General Electric (GE, news, msgs) advanced 92%, Exxon Mobil (XOM, news, msgs) advanced 73% and 3M (MMM, news, msgs) advanced 72%. Laggards included Boeing (BA, news, msgs), up 47%; American Express (AXP, news, msgs), up 38%; General Motors (GM, news, msgs), up 21%; and Alcoa (AA, news, msgs), up 22%.
- In 1995-1997, the country suffered through the Oklahoma City car-bombing, the partial shutdown of the nation in a congressional budget stand-off and the start of the Bosnian conflict, but also witnessed the birth of the commercial Internet and the blossoming of productivity enhancements in the workplace. Major industrial concerns fell during the period; 3M sank 4%; DuPont (DD, news, msgs) advanced just 30%, International Paper (IP, news, msgs) advanced just 15%, Goodyear Tire & Rubber (GT, news, msgs) advanced 12% and Boeing fell 12%. But it was a great time for innovators such as Merck (MRK, news, msgs), up 95%; Wal-Mart Stores (WMT, news, msgs), up 258%; and IBM (IBM, news, msgs), up 148%.
So how do we get this small group of stocks to do the 50% hill climb again from here? The recipe is fairly simple: Mix one part U.S. and global gross domestic product growth with two parts business innovation and fundamental revenue growth; add cost-cutting to improve income growth and a healthy pinch of price-to-earnings multiple expansion as a result of swelling investor confidence; season with a lower U.S. dollar, mild inflation and moderate interest rates; then bake for five years. And voila, a not-so-instant but still undeniably tasty Dow 15,000.
Stocks to watch
More specifically, here are two companies in the Dow to observe as youre waiting for the most magic elixirs of all -- time and compounding -- to do their work.- Johnson & Johnson (JNJ, news, msgs): This well-diversified maker of everything from toothbrushes and bandages to biotech drugs and cardiovascular devices has not participated in this years rally, sinking nearly 20% in the past 12 months. But it has three things going for it if you look forward: It performed much better than the Dow during the bear market, advancing nearly 30% from January 2000 through October 2002, in contrast to the 34% decline of the Dow, so it offers some safety in the event of difficulty. It continues to innovate -- introducing things like the Band-Aid Liquid Bandage for minor cuts; a new type of coronary artery stent that medicates patients as it props up their veins; and the great new low-calorie sweetener Splenda. And its recent decline, which discounts a lot of potential bad news on the pharmaceutical front, has improved its valuation to the point where it is fairly cheap from a historical perspective. To advance 50% in the next four years would require 10%-12% revenue growth, 8%-12% earnings growth and P/E expansion to the mid- to high-20s from its perch now in the low 20s. If Johnson & Johnson grows by half, itll still be smaller than the size of archrival Pfizer (PFE, news, msgs) today.
- Home Depot: This company does just one thing and does it extremely well. It sells hardware, remodeling and landscaping supplies to the ever-growing number of people who buy and own houses. It has averaged 16% annualized revenue growth over the past five years, and although it already has worldwide reach, it has many new cities both domestically as well as internationally -- China and India come to mind -- into which it could expand. The stock is up 32% in the past year, which is good, but it has not made the valuation outrageous as its P/E is below historical averages. With 12% revenue growth , 8%-10% earnings growth and a slight improvement in its P/E multiple, the stock of this well-managed company could advance 50% in four to five years, and it would still be less than half the size of Wal-Mart today.
Some of the other companies in the Dow that are less fortunately placed in the world economy also could surprise you. Earnings and revenue growth at aluminum producer Alcoa have been declining in recent years, but as the price of aluminum rises and its markets overseas expand, it could move up at least 25%-30% to help the cause. The stock has gone gangbusters this year -- up 40% -- on just the prospect of that occurring. Banking giant Citigroup has shocked skeptics continually with its reliable earnings growth, and it has been very busy in Asia over the past three years, buying mid-sized banks and other assets in Japan and Southeast Asia. And a new leadership team at Walt Disney (DIS, news, msgs) could reshape that companys ample assets into a much more potent growth force, and rekindle investors slumbering interest.
And finally, of course, there is the possibility that the laggards of the Dow, Eastman Kodak and AT&T (T, news, msgs), to be exact, either rediscover their mojo or get the boot. (The Dow 30 isn't static, after all, with members occasionally added and subtracted.) Waiting in the wings to replace the laggards are high-growth prospects like networking products maker Cisco Systems (CSCO, news, msgs), insurer American International Group (AIG, news, msgs) and drug maker Pfizer. The addition of any of those three could kick the Dow into overdrive in a couple of years all by itself.
In short, there is reason to be optimistic for Dow 15,000 if global economic growth does not peter out and investor confidence stays steadfast.
| Dow 15,000: What it would take | | Company Name | Market cap (in billions) | 11/6 Close | 50% higher | Markman '08 est. | Est. % chg | | General Electric (GE, news, msgs) | 285.5 | $28.44 | $42.66 | $41.24 | 45% | | Microsoft (MSFT, news, msgs) | 283.4 | $26.23 | $39.35 | $44.59 | 70% | | Wal-Mart Stores (WMT, news, msgs) | 254.8 | $58.33 | $87.50 | $93.33 | 60% | | Citigroup (C, news, msgs) | 252.2 | $48.89 | $73.34 | $88.00 | 80% | | Exxon Mobil (XOM, news, msgs) | 238.4 | $35.92 | $53.88 | $44.90 | 25% | | Intel (INTC, news, msgs) | 222.8 | $34.12 | $51.18 | $64.83 | 90% | | Int'l Business Machines (IBM, news, msgs) | 154.6 | $89.34 | $134.01 | $156.35 | 75% | | Johnson & Johnson (JNJ, news, msgs) | 144.9 | $48.84 | $73.26 | $80.59 | 65% | | Procter & Gamble (PG, news, msgs) | 126.6 | $97.56 | $146.34 | $146.34 | 50% | | Coca-Cola (KO, news, msgs) | 115.3 | $47.02 | $70.53 | $65.83 | 40% | | Merck (MRK, news, msgs) | 96.2 | $43.05 | $64.58 | $75.34 | 75% | | Altria Group (MO, news, msgs) | 95.9 | $47.30 | $70.95 | $68.59 | 45% | | Home Depot (HD, news, msgs) | 87.6 | $37.02 | $55.53 | $62.93 | 70% | | SBC Communications (SBC, news, msgs) | 76.9 | $23.14 | $34.71 | $27.77 | 20% | | J.P. Morgan Chase (JPM, news, msgs) | 73.9 | $36.31 | $54.47 | $58.10 | 60% | | Hewlett-Packard (HPQ, news, msgs) | 71.6 | $23.48 | $35.22 | $36.39 | 55% | | 3M (MMM, news, msgs) | 62.5 | $79.60 | $119.40 | $111.44 | 40% | | American Express (AXP, news, msgs) | 60.9 | $47.37 | $71.06 | $80.53 | 70% | | Walt Disney (DIS, news, msgs) | 47.8 | $23.40 | $35.10 | $49.14 | 110% | | United Technologies (UTX, news, msgs) | 41.1 | $87.33 | $131.00 | $122.26 | 40% | | DuPont (DD, news, msgs) | 39.9 | $40.10 | $60.15 | $50.13 | 25% | | McDonald's (MCD, news, msgs) | 33.1 | $25.98 | $38.97 | $37.67 | 45% | | Boeing (BA, news, msgs) | 31.1 | $38.89 | $58.34 | $52.50 | 35% | | Alcoa (AA, news, msgs) | 27.9 | $32.19 | $48.29 | $41.85 | 30% | | Honeywell (HON, news, msgs) | 26.2 | $30.44 | $45.66 | $39.57 | 30% | | Caterpillar (CAT, news, msgs) | 25.6 | $74.28 | $111.42 | $107.71 | 45% | | General Motors (GM, news, msgs) | 24.1 | $42.88 | $64.32 | $55.74 | 30% | | International Paper (IP, news, msgs) | 18.3 | $38.15 | $57.23 | $47.69 | 25% | | AT&T (T, news, msgs) | 14.8 | $18.77 | $28.16 | $22.90 | 22% | | Eastman Kodak (EK, news, msgs) | 7.1 | $24.58 | $36.87 | $31.95 | 30% |
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Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, Jon D. Markman owned or controlled shares in the following equities mentioned in this column: Cisco Systems.
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