The Dow's Best and Worst Stocks, Year to Date
Now that we've gotten through five months of 2013, it's a good time to review which stocks have performed well for the year, which haven't, and whether you should own any of them. With the Dow Jones Industrial Average having increased by 15.35% year to date, there have clearly been more big winners than big losers this year. With Caterpillar being the biggest Dow loser and down only 4.25% in 2013, and Hewlett-Packard being the biggest winner, up 71.37% in 2013, the difference is dramatic. But, let's look at why these stocks have performed the way they have, and whether you should own either of them. My conclusion may shock you!
Losers go first
Following top index loser Caterpillar is aluminum giant Alcoa , whose shares have fallen 2.07% year to date. The most likely reasons both companies have fallen this year are a struggling economy in Europe and a slowing one in China. Both companies need strong construction and manufacturing in the major world markets, and with all the issues in Europe, construction and development are stuck in the concrete -- which has lowered the need for Caterpillar's heavy machinery and for massive amounts of aluminum building materials.
In China, GDP figures are still healthy at around 7.5%, but with the country growing at double-digit rates just a few years ago, today's figures seem horrendously slow. The issue for Alcoa in China is that during the go-go days of high demand, a number of new companies came on the scene and started making aluminum. But now that demand has fallen, supply has remained the same and prices of the metal have declined over the past few years, which has put pressure on the stock price.
With Caterpillar, we saw countries and companies going crazy a few years ago and buying lots of machinery for all the construction projects they were working on. But now those projects have ended, and not as many news ones have begun. So now we're also seeing somewhat of an oversupply of dump trucks in some areas of the globe. Therefore, sales of Caterpillar have fallen over the past few months and the stock price followed suit.
Alcoa and Caterpillar are cyclical companies operating in industries that have massive ebbs and flows. Currently both are out of favor, but I believe Caterpillar is a good buy today if you plan on holding the company for the long term. Alcoa, on the other hand, may not recover from this downturn. Supply has been forever changed in the world aluminum market, and that will continue to put pressure on prices and Alcoa. While I don't think the company will ever return to all-time highs, it will survive.
As I mentioned, shares of HP have risen more than 71% since the start of 2013. The next best performing Dow stock is American Express, which has increased by 31.72%, and then Boeing, which is up 31.4%. Coming in fourth is fellow technology- and PC-related company Microsoft , which has gained 30.66% this year. But neither HP nor Microsoft has gotten a boost from the PC industry this year. Rather, weak PC sales have more than likely hurt both companies in 2013.
After having a dismal 2012, Hewlett-Packard is crushing the market and its fellow components this year, mainly because of her CEO Meg Whitman and her turnaround strategy. Whitman has explained that her plan will take roughly five years to complete and that the company is currently about 18 months into that time frame. From what we've been told, the turnaround plan is to lessen HP's reliance on the PC industry and move the company into a more well-rounded and balanced technology firm -- one that will offer top-of-the-line servers, cloud computing, information optimization, and data security.
On paper this all looks really good, and Meg Whitman is a great promoter when she's in front of crowds of investors and analysts. The company expects revenue to grow in line with GDP by 2016 and operating profits to grow faster, while leading the industry in margins and having discipline when it comes to capital allocation. Furthermore, the company is currently delaying research and development investments and allowing market share to decline because some deals didn't contain enough profit.
So this is where I find some problems. What if the U.S. economy falls back into another recession by 2016? What if Whitman and her team see what they believe is a great cheap acquisition candidate and decide to purchase it, but it turns out to be another Autonomy incident? What if, right about the time HP gets its newest offering running at full steam, something else new emerges in the technology world that customers soon start to shift toward? My point is that HP is still a struggling company as it stands today. Whether you believe in Whitman or not, a lot of things must go right over the next few years for HP to continue its turnaround. It all brings me to the conclusion that at this time, the risk involved in owning shares of HP is not worth the reward.
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The article The Dow's Best and Worst Stocks, Year to Date originally appeared on Fool.com.Fool contributor Matt Thalman owns shares of Microsoft. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513.
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