Investors have faced tough times for years, and things only seem to be getting worse. As Europe stubbornly fails to resolve its problems and Washington gridlock threatens the U.S. economy as well, 2012 could be a dangerous time for the stock market.
In times like these, the key is to protect your capital. That doesn't mean dumping stocks entirely, but it does mean making sure you have the best-quality stocks you can find -- and weeding out ones that aren't making the grade. You simply can't afford to take on big risk when the rewards simply aren't there.
Today, I'm looking at five stocks from the Dow Jones Industrials (INDEX: ^DJI) for which the consensus of analysts expects the worst returns next year. Those five Dow stocks are as follows:
Expected Sales Growth
Expected EPS Growth
Verizon (NYS: VZ)
IBM (NYS: IBM)
McDonald's (NYS: MCD)
Wal-Mart (NYS: WMT)
Home Depot (NYS: HD)
Source: Yahoo! Finance. Prices as of Dec. 15 close.
Several of these stocks also made our list of Dow stocks that made investors happy in 2011, so no one's saying that these companies don't have strong businesses. But with so little upside potential, it's entirely possible that the shares have already run their course -- and if an overall downturn in stocks does happen, then these past winners could be the first on the chopping block.
Even though you shouldn't just sell first and ask questions later based simply on pessimistic target prices, it gives you a good way to focus your research. So let's take a closer look at these five stocks to find out what else we can learn.
Verizon is the top U.S. player in wireless, but that doesn't mean it isn't facing challenges. Even if the AT&T (NYS: T) merger with T-Mobile comes off the table, Verizon still faces huge competition that's only going to get more fierce as the wireless industry matures.
IBM successfully made the transition from hardware to IT services. But lately, it has made a string of acquisitions to try to keep up with cloud-computing pioneers. Whether that proves enough to sustain its competitive edge remains to be seen.
McDonald's has been a darling stock this year, as its strategy of domestic diversification and emerging-market expansion has worked well. But after such a big jump in the shares, the company is vulnerable to both a European crisis and food-price inflation -- and that could be the catalyst to stop its bull rally dead in its tracks.
Wal-Mart finally reversed a long string of same-store sales declines last quarter. But the stock has been dead money for investors for a decade, and continuing pressure from both sides of the value retail industry will keep squeezing the company.
Home Depot has suffered throughout the housing slump, although it's benefited in part from homeowners who've had to remodel their existing homes rather than buy up to new ones. Yet calls for renewed weakness in housing could send the home-improvement industry back down again.
Are analysts too pessimistic?
That's the way to look at those stocks from the bearish perspective, which the consensus of analysts seems to favor. While analysts make plenty of mistakes, they're more often too rosy in their outlooks than too dour.
Still, with these stocks appearing fully priced, the slightest bad news could send them reeling. With such high expectations, you might want a stock that gives you a bigger margin of safety for next year.
To find exactly those kinds of stocks, I have a suggestion: Check out this free special report from the Motley Fool, which details five stocks that the Fool owns for its own portfolio. We think you should own them, too, but you can't buy them if you don't know what they are. So check out these stock ideas for yourself.
At the time thisarticle was published Fool contributorDan Caplingeris always ready for a good struggle. You can follow him onTwitter. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Wal-Mart and IBM.Motley Fool newsletter serviceshave recommended buying shares of Home Depot, McDonald's, and Wal-Mart and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool'sdisclosure policystands up for you.
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