There is no shortage of pundits and prognosticators willing to offer their opinions (rarely based on facts) as to whether or not stocks are cheap or expensive, or as to whether the markets are going to rise or fall. In every case, the opinions and prognostications are directed as generalities such as stocks or markets. In this context, the implication is that all stocks are the same, and therefore will all behave in the same manner or in tandem.
In contrast, it has long been our contention that it is a market of stocks and not a stock market. Moreover, we have also long argued in favor of making investing decisions one stock at a time instead of based on views about the general market. In our opinion, general statements about the value of markets or stocks as a class are prejudiced, and therefore we would argue illogical. Making brash and general statements about stocks is analogous to thinking like a racist. The bottom line is that it is just plain wrong thinking.
In truth, individual stocks are as unique and as different as individual human beings. Therefore, just like human beings, individual stocks should be measured and judged based on their own distinctive merit. Consequently, this article is offered to cast a bright light of insight reflecting the truth about investing in individual stocks based on their unique characteristics instead of prejudicial views attempting to paint them all with the same broad brush. Generalizing doesn’t work when evaluating people or common stocks.
The Dow Jones Industrial Average – A Diverse Group of 30 Companies
When people make the general statement that the market is up or down or that stocks are up or down, they are typically referring to either the S&P 500 (INDEX:.INX) or even more commonly the 30Dow Jones Industrial Average (Index:DJI) . The following CNBC headline is a case in point: “Stocks spiked Thursday, with the Dow jumping 100 points, after the Federal Reserve pulled the trigger on launching a new round of quantitative easing.”
Therefore, this article will look at the index the 30 Dow Jones Industrial Average (Index:DJI) commonly referred to as the DOW, since it only contains 30 stocks. Nevertheless, we will demonstrate that even such a small universe of stocks contains examples of companies with very diverse characteristics and histories. Thereby, establishing our thesis that it is more relevant to think of a market of stocks than it is a stock market. Like most things, the devil is in the details.
The following tables list the 30 DJIA stocks in alphabetical order and provides a simple snapshot of how diverse each of these individual companies are. The first column shows their historical earnings growth rates, followed by their dividend yields, their debt (note that we do not report debt on financials) and finally their respective sector. These simple metrics alone provide a statistical illustration of how truly different each of these individual “stocks” really are.
Six Specific Examples Representing 20% of the DOW
In addition to the erroneous overgeneralization of the asset class “stocks”, there is another bias that we feel both misleads investors and even keeps them in the dark regarding the pros and cons of investing in equities. Here I’m referring to the fixation on price movement and/or volatility while simultaneously disregarding the fundamentals of the business underpinning the stock. However, we contend that in the long run business results are far more important to investors than short-term price volatility is.
Consequently, we are going to utilize the F.A.S.T. Graphs™ (Fundamentals Analyzer Software Tool) to review 6 of the 30 DOW components, but with a twist. We’re only going to look at them based on earnings and dividends alone. In other words, we are going to exclude stock prices altogether. Our objective is to refocus investors away from the fixation on price and reorient it towards the business behind the stock.
When each company (stock) is looked at from this perspective, the differences between one business and the next are vividly revealed. Due to the inherent volatility of stock prices in an auction market, the common stock price charts of most companies tend to be difficult to differentiate. In other words, from looking at price alone it is hard to impossible to tell much about the business at all. This is where F.A.S.T. Graphs™ distinguish themselves from other graphic programs. Instead of the primary focus being on price, the primary focus is on the business first and price secondary.
Therefore, as you review each of the six sample DOW components below, we suggest that you focus on how different each company’s business results have been (the orange earnings line) and note from the performance tables the impact that these business results have had on long-term performance. We believe that these graphics will make a couple of things quite clear. First, we will be given an instant perspective of just how successful the business has been, and second, the performance results will vividly be reflective of each company’s operating history.
Alcoa, Inc (AA)
Our first example, Alcoa Inc. (NYSE:AA) shows a very cyclical company with no earnings growth (NMF stands for no meaningful figure). Clearly, we can instantly determine that , Alcoa Inc. (NYSE:AA) has a very unreliable record of earnings growth.
When we examine the performance associated with the above earnings (the orange line) and dividends (the blue shaded area) we should not be surprised to discover a few very important facts. First of all, since 1998 long-term shareholder owners of , Alcoa Inc. (NYSE:AA) would have lost almost half of their principal. Second, we discover a very unreliable dividend history to include two large cuts in 2009 and 2010.
Johnson & Johnson (JNJ)
Our second example looks at the blue-chip Johnson & Johnson (NYSE:JNJ) where we discover a sharp contrast from Alcoa. With this example we see a very steady record of earnings and dividend growth since 1998. However, it should be pointed out that since the great recession Johnson & Johnson (NYSE:JNJ)’s earnings growth has slowed. Nevertheless, we also see that the dividend has steadily increased with its earnings.
Johnson & Johnson (NYSE:JNJ)’s better earnings record has produced a steadily rising dividend and an S&P 500 (INDEX:INX) beating return. Clearly, there is very little similarity between the stock Johnson & Johnson and the stock called Alcoa.
E I Du Pont De Nemours And Co (NYSE:DD)
Our third example, E I Du Pont De Nemours And Co (NYSE:DD), shows a company with entirely different characteristics than our first two. With this company, we see not only a high-level of cyclicality, but also very little long-term earnings growth. However, the real point is that E I Du Pont De Nemours And Co (NYSE:DD) is a very different company than either Alcoa or Johnson & Johnson.
When we review the track record associated with DuPont’s business results, it’s not surprising that dividend growth has been very slow or that long-term capital appreciation has been slightly negative. In other words, inconsistent business results generated inconsistent and rather anemic income and growth as well.
International Business Machines Corp. (NYSE:IBM)