Eleven reasons to AVOID investing in Dow Jones Industrial Average stocks

Of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!).

When I first started writing this blog post, I was going to call it “How to Invest Safely in Stocks.” My second recommendation was that beginners should start with a handful of the 30 stocks that make up the Dow Jones Industrial Average. Once I started digging through the numbers, though, I was a startled at what I found. Apparently, the blue-chip stocks aren’t the no-brainers most investors like to think they are.

Need proof? Check out this chart I put together of the 10-year returns for each of the 30 Dow Jones stocks:

Company 10-Year Stock Return 10-Year Dividend Return on $1,000 investment $1,000 is now worth
3M Company +46.6% $590.94 $3,458 (aided by a stock split)
Alcoa Inc. -68.1% $134.46 $449.82
American Express Company +41.47% $122.40 $1,514
AT&T Inc. -31.8% $357.12 $1,024
Bank of America Corp. -51.8% $718.58 $1,109
The Boeing Company +12.54% $218.16 $1,311
Caterpillar Inc. +208.7% $787.17 $7,093 (aided by a stock split)
Chevron Corporation +113.9% $794.85 $4,791
Cisco Systems, Inc. -7% $7.20 $933
The Coca-Cola Company +45.2% $284.76 $1,734
du Pont +11.1% $372.72 $1,462
Exxon Mobil Corporation +82% $319.44 $2,086
General Electric Company -61.9% $200.4 $572
Hewlett-Packard Company +2% $123 $1,129
The Home Depot, Inc. -32.7% $117.58 $780
Intel Corporation -29.7% $136.54 $825
International Business Machines Corp. +57.1% $127.26 $1,605
Johnson & Johnson +20.8% $257.22 $1,426
JPMorgan Chase & Co. -16.1% $273.12 $1,107
Kraft Foods Inc. +8.7% $283.34 $1,339
McDonald’s Corporation +198.4% $387.25 $3,351
Merck & Co., Inc. -51.2% $218.70 $698
Microsoft Corporation -20.1% $416.64 $1,998
Pfizer Inc. -56.3% $196.56 $634
The Procter & Gamble Company +68.6% $607.79 $3,884 (aided by a stock split)
The Travelers Companies, Inc. +11.8% $120.34 $1,206
United Technologies Corporation +94.9% $529.54 $4,305
Verizon Communications Inc. -31.5% $305.33 $988
Wal-Mart Stores, Inc. +4.7% $130.29 $1,141
The Walt Disney Company +25.1% $110.20 $1,330

What’s startling is this: of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!). That’s remarkable considering I didn’t factor in inflation, which have averaged 2.4 percent over the past decade (per FinTrend.com).

That means your odds of throwing a dart at a list of the Dow stocks and hitting a winner are only around 63 percent. That’s not much better than going to the casino and counting a few cards at the blackjack table.

Before you toss your hands up and cash in your IRA for guns and ammo, though, I’d be remiss if I didn’t point out that the average return on $1,000 for the 30 Dow component stocks was $1,842 over the past 10 years. Indeed, a $1,000 investment in Caterpillar Inc. (NYSE:CAT) would be worth $7,093 today. That’s not bad, but seeing the returns from a company like GE, which has crumpled more than 60 percent over the past 10 years is scary. And this year hasn’t been kind to the Dow, either. Take a peek at the YTD returns on each of the component stocks:

Company Ticker YTD Return Dividend Yield
3M Company NYSE:MMM -10.8% 2.86%
Alcoa Inc. NYSE:AA -27% 1.07%
American Express Company NYSE:AXP +3.9% 1.61%
AT&T Inc. NYSE:T -3.17% 6.05%
Bank of America Corp. NYSE:BAC -51.8% 0.62%
The Boeing Company NYSE:BA -10.5% 2.88%
Caterpillar Inc. NYSE:CAT -14.7% 2.3%
Chevron Corporation NYSE:CVX +2.25% 3.34%
Cisco Systems, Inc. NYSE:CSCO -25.8% 1.6%
The Coca-Cola Company NYSE:KO +2.28% 2.79%
du Pont NYSE:DD -12.1% 3.74%
Exxon Mobil Corporation NYSE:XOM -4.02% 2.68%
General Electric Company NYSE:GE -17.3% 3.97%
Hewlett-Packard Company NYSE:HPQ -41.9% 1.96%
The Home Depot, Inc. NYSE:HD -7.9% 3.1%
Intel Corporation NYSE:INTC -7.85% 4.33%
International Business Machines Corp. NYSE:IBM +8.33% 1.89%
Johnson & Johnson NYSE:JNJ -1.51% 3.6%
JPMorgan Chase & Co. NYSE:JPM -21.2% 2.99%
Kraft Foods Inc. NYSE:KFT +6.47% 3.46%
McDonald’s Corporation NYSE:MCD +14.3% 2.78%
Merck & Co., Inc. NYSE:MRK -13.1% 4.85%
Microsoft Corporation NYSE:MSFT -14% 2.67%
Pfizer Inc. NYSE:PFE +0.9% 4.52%
The Procter & Gamble Company NYSE:PG -4.07% 3.40%
The Travelers Companies, Inc. NYSE:TRV -11.8% 3.34%
United Technologies Corporation NYSE:UTX -14.02% 2.84%
Verizon Communications Inc. NYSE:VZ -2.6% 5.6%
Wal-Mart Stores, Inc. NYSE:WMT -3.23% 2.80%
The Walt Disney Company NYSE:DIS -14.6% 1.25%

Just seven out of the 30 Dow component stocks have actually appreciated in value this year. That should give you pause before you invest in a high-profile company solely on the strength of its name and brand.

The Takeaway

Here are three key things I take away from the charts above:

1) Energy is the name of the game. One sector in the Dow has strongly out-performed others in recent years. Namely, oil (ala Chevron and Exxon). And I wouldn’t expect that to change – particularly as fears over inflation mount.

2) Banking stocks have a lot of ground to make up. The fact that JPMorgan Chase is down 16.1 percent over the past 10 years, and Bank of America’s down a whopping 51.8 percent could get you thinking banking stocks have to turn the corner soon. I’d argue there’s a lot of pain for them on the horizon, particularly with the imminent threat of inflation. Banks thrive and dive on interest rates, and all those fixed mortgages BAC’s underwriting at 3 percent could come back to bite them in a high-inflation environment. That’s a big part of why banking stocks have fallen in recent months, and it’s a trend I expect to continue.

3) Follow the macro-trends. If you would have invested $1,000 in gold at the start of 2001, you’d now be holding onto $6,797 in bullion. Energy and inflation are the stories du jour, and your portfolio should reflect that reality. No one can say the next 10 years will play out the same as the past 10, but we can say the demand for oil isn’t going away anytime soon, and neither is our government’s debt problem. You can’t afford to ignore the macro picture anymore, unless, of course, you’re happy rolling the dice in your IRA.

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Net income at Noah Holdings (NOAH) up 88 percent

With great wealth comes the desire to make even more of it, and Noah Holdings (NYSE:NOAH) appears perfectly positioned to help China’s newest millionaires amass even more cash.

First off, this disclaimer: Noah Holdings Limited (NYSE:NOAH) is one of the biggest holdings in my portfolio right now. A wealth management company that serves high-net-worth individuals in China, Noah released 4Q earnings last night. Analysts were spot on with their calls. The company reported $0.09 earnings per share, which met the Thomson Reuters consensus estimate of $0.09, according to AmericanBankingNews.com.

Net revenues at the company shot up 157 percent from $5.4 million in Q4 2009 to $14 million in Q4 2010. Over that same time span, net income attributable to shareholders rose 88.9 percent to $4.2 million. Those are heady numbers, and so are the company’s expectations for the rest of the year. Noah forecasts non-GAAP net income attributable to shareholders to hit a year-over-year increase in the range of 56.7% and 86.6%.

Analysts are also positive on the stock. JPMorgan Chase & Co. (NYSE: JPM) initiated coverage on Noah Holdings with an Overweight rating and a $22.00 price target last month. Bank of America (NYSE: BAC) analysts currently list Noah as a Buy with a $22.20 price target.

Both targets are more than 40 percent higher than the stock’s current price at $15.43. Apparently, I should have waited to buy my shares, which are down 3.5 percent since opening day, but I’m definitely not worried about the company’s long-term prospects.

There’s much talk about China’s burgeoning middle class, but, if luxury purchasing is any indication, the ranks of the upper class are swelling even faster. A new report by broker CSLA forecasts overall consumption in China will rise 11 percent per year over the next five years. Sales of luxury goods are expected to grow more than twice as quickly, by 25 percent a year.

“The wealth of China’s upper-middle class has reached an inflection point, reckons [the author of the CSLA report] Mr. Fischer. They have everything they need,” The Economist writes. “Now they want a load of stuff they don’t need, too.”

With great wealth comes the desire to make even more of it, and Noah appears perfectly positioned to help China’s newest millionaires amass even more cash.

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Buffett trims fat from portfolio (BAC, NKE, FISV, LOW)

Interestingly, Berkshire wasn’t the only investment company to shift capital out of banks. Trian Partners made the same bet in order to focus on food stocks.

We got a glimpse at Warren Buffett’s recent investment moves with Berkshire Hathaway Inc.’s (NYSE:BRK.B) 13F filing, which details the company’s stock trades through the end of 2010. Most notably, the Oracle of Omaha ditched 5 million shares in Bank of America Corp. (NYSE:BAC).

“He’s closing out a loser,” Jeff Matthews, author of ‘Pilgrimage to Warren Buffett’s Omaha’ told Bloomberg. “We bought it during the crisis. But its earnings power coming out the crisis has been reduced.”

Buffett took a loss of more than 55 percent on the trade after purchasing the shares during the height of the mortgage crisis. Some analysts see the move out of BAC as a sign that Buffett’s cleaning house as he prepares to hand over the reins to a group of successors.

Other positions Berkshire closed out last year:

  • Becton Dickinson & Co. (NYSE:BDX)
  • Comcast Corp. (NYSE:CMCSA)
  • Fiserv Inc. (NYSE:FISV)
  • Lowe’s Companies Inc. (NYSE:LOW)
  • Nalco Holding Co. (NYSE:NLC)
  • Nestle (NSRGY.PK)
  • Nike Inc. (NYSE:NKE)

Berkshire now holds positions in just 25 companies. That’s down from 37 in June, according to NewsyStocks.com. Interestingly, Berkshire wasn’t the only investment company to shift capital out of banks.

Trian Partners, which is headed by widely-followed investor Nelson Peltz, ditched stakes in Bank of America, J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp, (NYSE: USB), according to BizJournals.com, to make a big bet on food stocks, specifically Kellogg’s (NYSE: K).

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Analysts like Noah Holdings Limited stock (AMEX:NOAH)

Currently trading at a P/E ratio of 89, Noah’s shares sound expensive, but the company’s growth just might justify the premium.

A month and a half after Noah Holdings Limited’s IPO (AMEX:NOAH), analysts have started weighing in on the Chinese wealth management company, and they seem to like what they see – even at what appears to be an extremely high price for shares in a young company.

Here’s the first batch of analyst ratings that started rolling in earlier this month: JPMorgan Chase & Co. (NYSE:JPM) gives NOAH an “overweight” rating, and Roth Capital Partners joins Bank of America Corporation (NYSE:BAC) in listing it as a “buy.” Both Wells Fargo & Company (NYSE:WFC) and Oppenheimer (NYSE:OPY) started the stock at “perform.”

Noah targets wealth management products to high net worth individuals in China, and that’s a decent niche to fill. The ranks of China’s wealthy are swelling as high net worth individuals in the PRC controlled some $5.6 trillion in 2009, according to Reuters. That was good enough to rank them No. 4 in the world in terms of high net worth individuals in 2009.

Currently trading at a P/E ratio of 89, Noah’s shares sound expensive, but the company’s growth just might justify the premium. During the first half of 2010, Noah’s net revenue more than doubled to $13.7 million over the same period in 2009. Even better: Noah’s profits grew fivefold during that time span to $4.04 million.

“As investors, we like to see companies that can grow,” Benjamin Kirby, a Santa Fe, New Mexico-based analyst at Thornburg Investment Management, told Businessweek. Noah definitely meets that qualification, and that’s made me a believer in the stock.

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Credit card companies Visa (V), MasterCard (MA) tossed under bus

Visa Inc. (NYSE:V) fell further than any stock in the S&P 500 yesterday as it bled off 4.13 percent. It was joined at the party by MasterCard Incorporated (NYSE:MA), which dropped 3.05 percent. The catalyst? Analysts at Bank of America Corporation (NYSE:BAC) downgraded the stock from “neutral” to the dreaded “underperform.”

Visa Inc. (NYSE:V) fell further than any stock in the S&P 500 yesterday as it bled off 4.13 percent. It was joined at the party by MasterCard Incorporated (NYSE:MA), which dropped 3.05 percent. The catalyst? Analysts at Bank of America Corporation (NYSE:BAC) downgraded the stock from “neutral” to the dreaded “underperform.”

Analysts cited stiffer regulations and rising costs as they gave Visa and MasterCard the proverbial middle finger.

“We believe it will be difficult for the current balance of power in the payment system to be sustained longer term, with Visa generating 55% plus operating margins while issuers and merchants struggle to make money,” research analysts at BAC told clients in a note (per the Wall Street Journal).

Not everyone’s so bearish on Visa and MasterCard, though, even in the face of the seemingly harsh financial reform bill that passed in July. The companies posted great 2Q numbers (revenue jumped 23% at Visa), and they’ve been largely insulated from the credit crunch since they don’t make money off of credit card users but rather off the fees banks pay the companies to process credit card purchases.

The thing that’s really got BAC’s analysts in a tizzy, though, are regulatory changes that will increase competition among debit card processors, which could potentially lower Visa’s rake. Under the reform, U.S. merchants must have at least two options when they choose a debit card processor – no longer will they just have Visa as an option. That means good, old-fashioned American capitalism will be at play. That could be a boon for merchants and banks and a downer for Visa and Mastercard (at least as long as we can keep them from colluding in the shadows).

Can AutoZone, Inc. (NYSE:AZO) really hit $240?

Now, we’ve got to ask ourselves if AutoZone is still a buy despite hitting all-time highs. And the answer seems obvious: yes. The company’s been punching it out with O’Reilly Automotive, Inc. (NASDAQ:ORLY) and Pep Boys (NYSE:PBY) for years. They’ve got well over 4,000 retail outlets in the country, and their P/E is the lowest among their competitors.

Bank of America (NYSE:BAC) believes in AutoZone, Inc. (NYSE:AZO), and they’ve raised their price target on the stock to $240. Can it really go that high?

Looking at long-term chart for AutoZone is like standing at the base of a mountain and looking up. It just keeps climbing. AZO has returned 865 percent over the past 10 years and 135 percent over the past five years. That five-year return doesn’t sound too flashy, but it’s better than the combined returns of Google Inc. (NASDAQ:GOOG) and Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A) during the same period.

I remember looking at AZO during the early days of the Great Recession, seeing its chart, and thinking that everything looked good. Somehow, though, the stock seemed too boring to buy. It wasn’t sexy, and I decided to trade financial stocks instead (getting burnt in the process). I should have taken Warren Buffet’s approach: focusing on stocks that make steady profits no matter what the investing climate.

Now, we’ve got to ask ourselves if AutoZone is still a buy despite hitting all-time highs. And the answer seems obvious: yes. The company’s been punching it out with O’Reilly Automotive, Inc. (NASDAQ:ORLY) and Pep Boys (NYSE:PBY) for years. They’ve got well over 4,000 retail outlets in the country, and their P/E is the lowest among their competitors. Best of all? The company’s management owns 9.9 percent of AutoZone’s shares. Compare that to O’Reilly’s management, which owns just 3.8 percent of their company, and Pep Boys’ management, which owns a paltry 1.4 percent of their company’s stock.

Trading north of $200 per share, AutoZone seems ripe for a split, and it shows a lot of potential for ongoing growth. I didn’t go with my gut two years ago, so I probably should now.

The biggest winners and biggest losers at for-profit colleges

The for-profit college sector’s getting trashed and you should sell short or go home. For-profit colleges could face the fate of payday lenders: ridiculously low P/E ratios overshadowed by a darkening storm cloud that’s hovering over their heads. No wants to invest in that climate, at least until we see signs that the cloud is breaking up.

Bank of America Corporation (NYSE:BAC) is picking and choosing winners and losers in the for-profit college sector, after downgrading ITT Educational Services, Inc. (NYSE:ESI) yesterday. ITT plunged 3.5 percent.

Bank of America noted that entire sector would be under pressure in the face of regulatory reform, and they trimmed estimates on for-profit colleges – predicting that profits would be around 10 percent per year.

Blanket downgrades like that often point out the weaker, trendier stocks and Capella Education Company (NASDAQ:CPLA) and Bridgepoint Education, Inc. (NYSE:BPI) were hit even harder than ITT. Capella shed 5.9 percent on low volume (not a good sign) and Bridgepoint lost 7.4 percent (again on low volume). Here’s a peek at yesterday biggest losers in the sector:

  • Bridgepoint Education, Inc. (NYSE:BPI) -7.4 percent
  • Capella Education Company (NASDAQ:CPLA) -5.9 percent
  • Strayer Education, Inc. (NASDAQ:STRA) -4.4 percent
  • ITT Educational Services, Inc. (NYSE:ESI) -3.6 percent
  • DeVry, Inc. (NYSE:DVP) -3 percent
  • Corinthian Colleges, Inc. (NASDAQ:COCO) -1.7 percent

The smallest loser was also the most visible: Apollo Group, Inc. (NASDAQ:APOL), which shed just 0.46 percent. Bank of America maintained its “buy” rating on Apollo – the parent company of the University of Phoenix. Their logic? Apollo Group will be the most likely for-profit college to meet the proposed Department of Education rule that more than 65 percent of graduates be able to pay back their student loans in order for the college to still qualify for federal aid dollars.

My logic? The sector’s getting trashed and you should sell short or go home. For-profit colleges could face the fate of payday lenders: ridiculously low P/E ratios overshadowed by a darkening storm cloud that’s hovering over their heads. No wants to invest in that climate – at least until we see signs that the cloud is breaking up.

Earning future looks dim for Goldman (GS) and Morgan Stanley (MS)

If the earnings results from commercial banks are any indication, the investment banking sector could get hammered this week with reports from Goldman and Morgan Stanley.

After some unimpressive earnings from the commercial banking giants, things don’t look great for the upcoming earnings releases from investment banks Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).

On the commercial side, revenues were down at all three of the biggest banks:

  • Bank of America Corporation (NYSE:BAC): Revenue -40 percent
  • Citigroup Inc. (Public, NYSE:C): Revenue -26 percent
  • JPMorgan Chase & Co. (NYSE:JPM): Revenue -24 percent

The good news? The three commercial banks generally beat analysts estimates, but they did it on lower credit losses as consumers hunker down to pay off their debts (another factor that could slow the economy at large).

If the commercial banks are any indication, earnings from the biggest investment banks will be unimpressive, too. Be wary of a sell-off in shares of Goldman and Morgan Stanley. Goldman is slated to report their earnings on Tuesday, July 20, before the market open. Analysts are calling for earnings of $2.04 per share, down $2.89 from a year ago. Morgan Stanley will report earnings Wednesday, July 21, before the market open. Analysts are anticipating earnings of $0.46 per share, up $1.83 from a year ago’s loss of $1.37 per share.