A year ago we were asked what stocks looked like good buys in the Dow Jones Industrial Average for 2013. The markets did tremendously well last year. Microsoft Corp. (NASDAQ: MSFT) was up 44% and 3M Corp. (NYSE: MMM) came in as the year’s fifth top performer, up 54%. 2013’s top performer was The Boeing Company (NYSE: BA), up 84%. The company was able to get its Dreamliner in production, and has cut back on research and development to focus on its backlog of orders. This leads us to ask, “What will the Dow do in 2014?”
One we do not own, J.P. Morgan Chase, Co. (NYSE: JPM) looks very attractive. It is trading at a price/earnings to growth ratio of 1.74. We also like to consider the price/earnings to growth and dividend yield (PEGY) ratio of stocks. Exxon Mobil Corp. (NYSE: XOM) has a PEGY of 0.6, meaning their growth prospects are much greater than their current price reflects. Even price-appreciated stocks like Home Depot Inc. (NYSE: HD) has a PEGY of 1.17, with a dividend yield of 1.78.
Johnson & Johnson (NYSE: JNJ) has made a relatively good comeback, as the CEO is making changes to the company. He is taking it back to its founding principles. UnitedHealth Group, Inc. (NYSE: UNH) stands to benefit from the increased numbers of individuals buying insurance.
Overall, there are many companies in the Dow with good price to earnings, and many that pay a dividend. We would be comfortable with investors holding most of them.
2013 was a fantastic year. Can the markets repeat it? Since 1945, the markets were up more than 25% 10 times. Eight times the following year had a positive return. For all 10 years, the average next year return is 14%—including the two years the market was down following a 25%+ year. In those two negative years, we saw signs of recession, so the down market wasn’t even a surprise. With no signs of recession on the horizon, and looking through our rose-colored glasses, we might say the market should have a good year in 2014.
However, anything can happen. The markets have not had a 10% correction since 2011. Television pundits are predicting a down year because the first day of trading in the new year was down. We expect the markets to be a bit volatile around economic readings and Fed moves.
With current economic growth better than expected, we believe it is possible to see earnings increase 10% in 2014, and earnings, generally, drive the market higher.
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