Of course, given that the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) — the sole ETF trading the whole Dow — has a mere pittance in assets compared to those invested in the S&P 500, it’s a safe assumption that most people aren’t even invested in the whole Dow. They’re more likely invested in just a few components of the Dow.
So, rather than asking, “Can the Dow keep it up?” perhaps a better question is, “Which stocks in the Dow can keep it up — and which can’t?” While a number of components are at play here, let’s look at two that definitely look poised to keep running, and two others that could easily hold the index back in the next couple years.
Best Performer: UnitedHealth Group
My first selection is UnitedHealth Group (NYSE:UNH), whose main business is providing healthcare benefit plans for corporations and individuals primarily in the U.S. but expanding internationally.
Serving 41 million people worldwide, UNH’s growth will come from providing healthcare benefits outside the U.S. In 2012, it took a big step forward acquiring 65% of Amilpar, Brazil’s largest provider of private healthcare coverage, for $3.5 billion. It will acquire an additional 25% for $1.3 billion in the first half of 2013 with its CEO and shareholders retaining 10%.
With skin in the game, CEO Edson Bueno will move quickly to take advantage of the huge opportunity that exists in Brazil. While Amilpar had 5.8 million plan members at the end of 2011 — which was 61% higher than its next biggest rival — it still represents just 7% market share. Even more compelling is the fact just 25% of the Brazilian population has private health insurance with the greatest coverage in Sao Paulo and Rio de Janeiro. With something like 1,542 private healthcare coverage providers in the country, consolidation is going to be fast and furious.
With UnitedHealth’s stock being flat on the year while 16 of the Dow components are up double digits, I believe Mr. Market will grow to appreciate its push into Brazil. Look for a big move later in the year.
Best Performer: American Express
My second selection is American Express (NYSE:AXP), whose credit card business continues to deliver more than satisfactory results. Its adjusted net income per share in 2012 was $4.40, 6.8% higher than in 2011. Revenues increased 5% year-over-year to $31.6 billion (net of interest expense) with its U.S. Card Services delivering over half that total.
But the real winner this past year for AmEx was its Global Network & Merchant Services segment, whose revenues grew 7% year-over-year to $5.3 billion while delivering 12% growth in net income. Even better, the segment delivers 27% of AmEx’s overall profit from just 17% of its overall revenue. In 2012, its basic cards-in-force (excludes supplemental cards) outside the U.S. exceeded those domestically for the first time in its history. That bodes well for its future.
Not that you need any additional reasons to own American Express, but it goes without saying that Berkshire Hathaway‘s (NYSE:BRK.B) 13.7% stake in the company (its largest shareholder by wide margin) represents a genuine stamp of approval. In his annual letter to shareholders, Warren Buffett indicated that it would likely increase its ownership interest in American Express in the future, calling it an extraordinary business.
Need I say more?
Worst Performer: Hewlett-Packard
In some ways, it’s tougher to pick the losers than the winners. That’s because over the past 48 years, the S&P 500 (I borrowed this stat from Buffett’s annual letter and he uses the larger index) has risen on 37 occasions, or 77% of the time. By going negative, you’re naturally swimming against the tide. But I digress.
My first loser is Hewlett-Packard (NYSE:HPQ). It’s up 48% year-to-date through March 11, reversing a three-year losing streak that saw its stock drop 57% since the end of 2009. I’m taking a chance here because reversion to the mean seems to be setting in; over the long haul, its stock has seen mediocre returns.
Vitaly Katsenelson, chief investment officer for Denver-based Investment Management Associates, makes a compelling argument why Hewlett-Packard is an attractive investment. While he’s right to point out that HP generates $5 billion in free cash flow and CEO Meg Whitman is making a concerted effort to reduce its debt position, it has a long way to go both financially and operationally before it can move up into the 30s.
In November, Moody’s lowered HP’s long-term credit rating from A3 to Baa1, affecting about $25 billion in debt. The ratings agency suggested this revision would likely remain in place for at least 18 months, raising the rating only if it could demonstrate steady organic revenue growth, EBIT margins above 9% and adjusted debt no more than 1.5 times EBITDA. Currently, HPQ is nowhere near any of those three targets. To meet and exceed these numbers, it will have to deliver a strong 2013, and I just don’t see that happening.
With much of its gains YTD secured in the past month, I see little gas left in its tank. Any bad news, and Hewlett-Packard is sunk.