These 2 Dow Laggards Could Rebound in 2013

December 16, 2012 1:41 pm
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These 2 Dow Laggards Could Rebound in 2013

Barring an epic collapse, the Dow Jones Industrial Average is likely to finish 2012 solidly in the green. As measured by the SPDR Dow Jones Industrial Average (NYSE: DIA), the Dow tracking ETF, the venerable blue-chip index is sitting on a year-to-date gain of 10.3 percent as of December 14.

That does not mean that all 30 of the Dow’s components have set the world on fire this year. As of December 14, four Dow components – DuPont (NYSE: DD), Hewlett-Packard (NYSE: HPQ), Intel (NASDAQ: INTC) and McDonald’s (NYSE: MCD) – are down for the year, according to Finviz data.

It is worth noting that that number is down from six Dow losers for 2012 just a week earlier. Following up on a recent look at what 2013 might have in store for some of the Dow’s worst 2012 performers, what follows is a look at how some Dow laggards may perform next year. In this case, some of the laggards are stocks with year-to-date gains that are below those of the Dow.

Johnson & Johnson (NYSE: JNJ)
The Dow is home to three big pharmaceuticals firms – Merck (NYSE: MRK), Pfizer (NYSE: PFE) and Johnson & Johnson. One has stood out in 2012 and not for good reasons. The standout is Johnson & Johnson because the shares up “just” 7.8 percent. That is less than half the returns offered by Pfizer and barely more than half of what Merck has delivered to investors.

Things got so bad for J&J that even Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) has all but said enough is enough. A few years ago, Berkshire owned about 45 million shares of J&J. At the end of the third quarter, that number had dwindled to 492,000. That makes J&J one of Berkshire’s smallest holdings in terms of number of shares as of the end of the third quarter.

There is a bull case for the stock, one that Barron’s highlights in its most recent issue. The company has $2.9 billion in cash, an AAA credit rating and one at least one analyst has an $85 price target on the shares, Barron’s notes. That is well above the current level of just over $70.

Of course the dividend is a source of allure with this stock, too. The shares currently yield 3.4 percent and J&J has a dividend increase streak that spans five decades.

Chevron (NYSE: CVX)
Neither of the Dow’s oil components have delivered gains worth writing home about in 2012, but Exxon Mobil’s 3.92 percent increase sure looks good compared to Chevron’s meager increase of 1.33 percent. Chevron’s Latin America woes are a large reason behind the company’s doldrums.

The company is still grappling with an $18 billion judgment levied against it by an Ecuadorian court last year. Alleging rampant fraud and that it was unable to introduce critical evidence in its defense, Chevron is fighting the judgment. As it should. After all, the Ecuadorian legal system is not known to be among the world’s most advanced and $18 billion is a significant chunk of Chevron’s current $211 billion market cap.

However, the Ecuadorian issue still has not been put to bed. At least the company is close to reaching a resolution in Brazil, where it is fined for issues relating to a 2011 spill at the Frade Field.

What Chevron has in its favor is $21.3 billion in cash. That is more than Exxon or Royal Dutch Shell (NYSE: RDS-A). That cash hoard along with a recent shelf registration have stirred speculation Chevron is planning a big acquisition.

That remains to be seen. Chevron, often admired by peers for its prudence, may not opt for a mega-deal, but a smaller deal for firm such as Kosmos Energy (NYSE: KOS) is not out of the realm of possibility. Investors can afford to be somewhat patient with Chevron. The shares yield 3.3 percent and the company has boosted its dividend for 25 consecutive years.

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