by Lawrence Meyers | February 20, 2014 3:33 pm
What goes clink-clank-clunk, moans a lot and scares people?
No, it’s not the ghost of Jacob Marley. It’s the sound of the Ghost of the Dow Jones Industrial Average, because I consider it to be a useless index.
The Dow Jones is not diversified enough and contains a bunch of stocks that are as old and moldy as the rotting fruit in my refrigerator from three weeks ago. I think there are several stocks in the index that not only should be kicked out of the index … but also from your portfolio.
Here’s a look.
Cisco Systems (CSCO) was one of the high-fliers of the late 1990s. Since then, CSCO stock has become moribund and bordering on irrelevant — just like the Dow Jones Industrial Average!
Cisco’s latest earnings were pathetic. Revenues were down 7.8%, and net profit cratered by 54%. The Americas region, which was always CSCO stock’s reliable hitter, was poor. Service provider video was the worst segment, with revenue down 21.5% and actual orders down 20%. The order backlog is declining, too. Wireless was stagnant with a 1.8% decline in revenues. In fact, there was a sequential decline in order booking.
CSCO even admitted things stink, forecasting a revenue decline of 6% to 8% for the year, and flat to lower earnings.
It’s not like Cisco is going bankrupt, as it generates tons of FCF each year. It just isn’t growing, and investors pay for growth, not stagnation. At 11 times 2014 earnings, I say you can do better. If you want a cash flow play that pays more than CSCO stock’s 3.4% yield, go with AT&T (T).
International Business Machines (IBM) is as stodgy as the PC character in those famous Mac commercials. Unimaginative, non-innovating, plodding.
Yes, IBM stock happens to be reasonably valued at 9 times forward earnings on 9% long-term EPS growth, but a lot of that earnings growth comes on the “per share” side thanks to buybacks.
I think IBM stock has been living off its legacy, and IBM stock is one of those companies that gets hired simply because of the safe name, which means whoever in senior management makes that call, he knows he won’t lose his job. But look, revenue has been as flat as a yeastless pancake. In Q4, revenue actually fell 5%.
Ask yourself this: Are there other companies where you can earn a 2.1% yield that are actually growing revenues? The answer is a vehement “yes.”
Just about any hotel REIT is the place to start. Buh-bye, IBM stock.
I’m going to say it. You know I will. Walmart (WMT). The king of retailers looks more like a court jester these days. It isn’t just that WMT stock revenue is going to only rise 1.7% this year, and EPS about 2%, but Walmart means nothing in an Amazon (AMZN) world.
Whenever I look to order basic cleaning supplies, the lowest prices show up on WMT stock and Amazon. The latter always wins because I can get it faster and with less hassle via mail order, and with Amazon Prime, I get it shipped free. Walmart’s stores have gone dingy. Service is awful. I don’t want or need to wait in lines when I can get everything online.
If that sounds a little too anecdotal, OK, though you’ll find increasing numbers of people who’ve shared the same experience. But the numbers don’t lie, and the aforementioned earnings and revenue numbers are lousy.
Again, why pay for no growth to get a 2.5% yield? You don’t have to.
These three Dow Jones stocks are done. Sell ‘em and buy something else.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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