The Dow Jones Industrials Index has hit new record highs. The long-awaited Dow Jones 20,000 level is finally upon us. It feels like a lifetime ago when the Dow first hit 10k. It’s no surprise that investors are in a jubilant holiday mood as 2016 ends with a stunning push higher.
However, those gains have laid some traps for 2017. Record prices for an index often indicate that at least some of the member companies within that index are reaching frothy prices. And 2016 is no exception to the pattern.
The bull market is now ending its seventh year. U.S. corporate earnings have been more or less flat since 2011. The economy has picked up a little strength, but it’s hardly roaring. The latest rally is based on Donald Trump enthusiasm. But political gains often evaporate; the market will face a big test after Jan. 20 when Trump promises get put to the test.
With all that in mind, here’s three of the more risky Dow stocks to sell now heading into 2017.
Dow Jones Stocks to Sell: Disney (DIS)
Walt Disney Co (NYSE:DIS) has rallied more than 15% within the past two months. In addition to general Trump enthusiasm, Disney has specifically benefited from the hype for the new Star Wars movie. That makes sense — the movie has dominated at the box office.
But we must remember that Walt Disney is a huge firm, and movies aren’t the most important earnings driver. The company’s crown jewel is ESPN.
The company currently earns huge margins on ESPN, but these are under fire with the cord-cutting movement. In November, Nielsen released data showing that ESPN had lost more than 600,000 subscribers in a single month.
Disney claimed the large declines at ESPN are due to anomalous data. But folks aren’t buying it. RBC’s analyst suggested Disney should consider selling or spinning off ESPN, since it could fetch at least $22 billion to a private buyer. Until that happens, DIS stock could remain pressured. There are real concerns in the cable industry, and Disney is exposed.
Dow Jones Stocks to Sell: Goldman Sachs (GS)
Goldman Sachs Group Inc (NYSE:GS) has been a huge post-election winner. GS stock is up from $180 around election day to $240 today. That’s a cool 33% gain for a firm that was already huge; did Trump’s victory really add more than $20 billion to the company’s valuation?
The bull case centers around higher interest rates, which help banks. Also, Trump may help the financial sector with deregulation and more favorable tax policy. That’s all well and good. But Goldman has been a poor performer in recent years. GS stock traded at $200 per share prior to the financial crisis. It again traded at that level in 2015, before dipping again.
Investors are now assigning the firm $60 per share in Trump-added value. But given the company’s near-20x price-to-earnings ratio (exceedingly high for an investment bank) and paltry 1.1% dividend yield, upside is already priced in.
If Goldman Sachs continues in its recent plodding manner as far as earnings go, you’ll see GS stock back at $200 soon enough.
Dow Jones Stocks to Sell: Boeing (BA)
Shares of Boeing Co (NYSE:BA) jumped following the election, and now BA stock is nearing new 52-week highs. Boeing is on the rise as investors hope that Trump’s stimulus plans and defense budget will translate to strong aviation demand. Ignoring Trump’s twitter spat with Boeing over the price of Air Force One, this theory does makes sense.
However, Boeing’s gains are likely to be overshadowed by setbacks elsewhere — namely, the strengthening U.S. dollar continues to make life miserable for Boeing. The Seattle Times reported that Boeing plans to lay off yet more people in 2017. The company blamed “fewer sales opportunities and tough competition” for the further layoffs. These job cuts come on top of the 8% workforce reduction in 2016.
Boeing is forced to make these moves since it largely produces its planes in the U.S. Thus, it has to pay its workers in dollars. The U.S. dollar has appreciated sharply against the Euro; chief rival Airbus Group SE (OTCPK:EADSY) is based out of Europe. Other commercial jet makers are headquartered in Canada and Brazil, whose currencies are also losing altitude against the greenback.
Sure, Boeing may gain some on the defense side. But the commercial side is facing stiff competition not reflected in BA stock. Layoffs don’t lie.
At the time of this writing, Ian Bezek had no positions in any of the mentioned stocks. You can reach him on Twitter at @irbezek.
