Let the word go forth. On Tuesday, Feb. 28, 2012, the Dow Jones Industrial Average (INDEX: ^DJI) returned to 13,000. Crisis averted. Recession receded. All's well that ends well, right?
Well, not necessarily. While it's true the Dow is now back above 13,000, that's not the end of the story. In fact, the more you look at the numbers, the less the Dow's rise to 13,000 seems to mean at all.
Victory for a few
The Dow may be back to 13,000, but the truth of the matter is that the Dow itself represents the fortunes of only a handful of companies out of the thousands of listed equities on U.S. markets, and the thousands upon thousands of businesses -- public and private -- that make up the U.S. economy. What's more, even within the tightly circumscribed circle of the 30 companies that make up the Dow, only a very few companies have actually enjoyed real success over the past five years.
Here. Take a look for yourself:
International Business Machines Corporation Total Return Price Chart by YCharts
Each of these four companies -- Caterpillar (NYS: CAT) , Chevron (NYS: CVX) , IBM (NYS: IBM) , and McDonald's (NYS: MCD) -- has enjoyed strong gains in share price over the past five years. Each is worth at least 50% more today than it was back when the Dow last hit the kinds of prices we're seeing again today.
Not all companies have been so fortunate, however. The Dow may be back to 13,000, and it may be within spitting distance of the 14,164 points it closed at on Oct. 9, 2007, but AT&T, Cisco, Hewlett-Packard, and JPMorgan Chase are all roughly 20% below their share prices of five years ago. Alcoa has lost more than 60% of its market cap, and Bank of America more than 80%!
AT&T Total Return Price Chart by YCharts
Try telling shareholders in any of these companies that the Dow is at 13,000, the recession is over, and everything's back to normal. See what reaction you get.
Where do we go from here?
The truth is that the resurgence of the Dow, the bounceback from sub-7,000 levels to today's 13,000-plus, has depended to a large extent on the fortunes of just four high-performing stocks. Out of a cast of the thousands of stocks that populate the U.S. stock markets, that's a pretty thin blue chip line trying to hold the Great Recession at bay. It behooves a Fool to ask, therefore, how much longer we can expect Cat, Chevron, IBM and Mickey D's to pull more than their weight and keep the Dow expanding.
Because according to Wall Street analysts, there's really only one of these companies that's expected to contribute meaningfully to U.S. economic growth over the next five years: Caterpillar. According to Wall Street analysts, IBM is only expected to keep growing its earnings at about 11% per year over the next five years. With its stock priced at more than 15 times earnings, that may not be enough.
McDonald's, expected to grow at sub-10% levels, looks even more vulnerable at a P/E ratio of nearly 19. And Chevron, while nicely priced at eight times earnings, also sports the weakest growth outlook of the bunch -- barely 4%.
This stock's no lion, either
Indeed, even Caterpillar could be at risk. According to the consensus of 21 analysts polled, Cat could keep growing its earnings at better than 26% per year for another half-decade. With a share price of just 15.5 times earnings, that sounds pretty good. In fact, it was good enough to convince me to publicly recommend the stock last year on Motley Fool CAPS.
Lately, however, I've begun to rethink that position. After noticing how Caterpillar's increased need to spend on capital improvements was eating away at free cash flow, I decided to close my bullish position on Cat and adopt a neutral stance on the stock. (Yes, I did beat the market on it while the position was open. Thanks for asking.)
And then there were none
Now I don't mean to sound ungrateful. These past five years, Cat, Chevron, IBM, and McDonald's have all done yeoman's work helping to pull the Dow out of the dumps. But with valuations on three of the four looking pricey, and Caterpillar no better than fairly valued, I have my doubts that we can depend on them to keep the rally going.
If the Dow's going to keep climbing and regain the heights of 14,000 and change that it held years ago, it's time for one (or more) of the Dow's other members to step up and pull some weight. Which of the other 26 contenders do you believe will outperform in the next half-decade? Tell us in the comments section below. If you need some help deciding, take a look at the Fool's new free report: "3 American Companies Set to Dominate the World."
At the time this article was published Fool contributor Rich Smith does not own shares of any company mentioned above. The Motley Fool has a disclosure policy. The Motley Fool owns shares of International Business Machines, JPMorgan Chase, Bank of America, and Cisco Systems. Motley Fool newsletter services have recommended buying shares of McDonald's and Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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