Is Dow 17,000 Alarmingly High? This Analysis May Surprise You!


Home Depot Inc (HD)

“The Home Depot, Inc. operates as a home improvement retailer worldwide. The Home Depot stores sell an assortment of building materials, home improvement products, and lawn and garden products, as well as provide various services.”



Procter & Gamble Company (PG)

“The Procter & Gamble Company provides branded consumer packaged goods. The company’s products are sold in approximately 180 countries and territories primarily through retail operations including mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, high-frequency stores and e-commerce. The company has on-the-ground operations in approximately 70 countries.”

 

 

 

Johnson & Johnson (JNJ)

“Johnson & Johnson, together with its subsidiaries, is engaged in the research and development, manufacture and sale of a range of products in the health care field. The business of the company is conducted by approximately 275 operating companies located in 60 countries, including the United States, which sell products in all countries worldwide.” 

 

 

Caterpillar Inc (CAT)

“Caterpillar Inc. manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.”

 

  American Express Company (AXP)

“American Express Company, together with its subsidiaries, provides charge and credit payment card products and travel-related services to consumers and businesses worldwide.”

 



McDonald’s Corp (MCD)

“McDonald’s Corporation franchises and operates McDonald’s restaurants in the restaurant industry. The company’s restaurants serve a menu at various price points in approximately 100 countries worldwide.”

 



The Boeing Company (BA)

“The Boeing Company, together with its subsidiaries, operates as an aerospace company worldwide.” 



United Technologies Corp (UTX)

“United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide.”

 

 

 Merck & Co Inc (MRK)

“Merck & Co., Inc., a health care company, offers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. The company’s operations are principally managed on a products basis and comprise four segments, which are as follows: Pharmaceutical, Animal Health, Consumer Care, and Alliances (which includes the company’s relationship with AstraZeneca LP).”

 

E.I. du Ponte (DD)

“E. I. du Pont de Nemours and Company operates as a science and technology based company worldwide. The company’s subsidiaries and affiliates conduct manufacturing, seed production or selling activities. It has operations in approximately 90 countries.”

 

 

 

 Summary

Even though the Dow Jones Industrial Average recently broke through the 17,000 barrier representing an all-time high, it does not automatically follow that it is dangerously overvalued.  17,000 is just a number representing the sum of the component prices divided by a divisor.  As such, it is, in essence, a reflection of the price of the 30 Dow components.  However, in order to determine valuation, it must simultaneously be measured relative to the earnings power (fundamental value) of each component.

The 30 earnings and price correlated graphs of each of the 30 Dow constituents was presented in order to provide a clear perspective of price related to fair value based on the earnings power of each company.  The objective behind this exercise was to provide the reader a more comprehensive perspective and understanding of the relative valuation of each component in order to establish a clearer point of view of the current state of the stock market as represented by the Dow Index.

Conclusions

Based on a fundamental analysis of each of the 30 Dow components, it has become clear that the Dow is not as high as it looks based on the fair value of its constituents.  No less than half of the 30 Dow stocks are currently trading at reasonable valuations based on each company’s earnings power.  There are a few Dow components that appear pricey today.  Yet even though the index is at an all-time high, there is still an amazing amount of value to be found within the group.

Disclosure:  Long TRV,IBM,CVX,CSCO,PFE,T,WMT,UNH,VZ,MSFT,INTC,GE,MCD,UTX,CAT,JNJ,PG,KO,V at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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About the Author

ChuckCarnevale
Charles (Chuck) C. Carnevale – Co-Founder and Chief Investment Officer, has been working in the securities industry since 1970. He has been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President, Regional Marketing Director for a major American Stock Exchange listed company, and he was an Associate Vice President and Investment Consulting Services Coordinator for a major NYSE member firm. Prior to forming EDMP, Inc., he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck is a sought-after public speaker who is very passionate about spreading the critical message of prudence in money management. Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.

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