This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Dow Is Setting Its Sights on 13,000

Call me a raging bull. Anyone who has followed my writing on RealMoney since December 2000 knows that I never predict specific levels in the market indices. Until now, that is.

I won't give you an exact date, but I will say this: On the basis of my quantitative valuation work, I wouldn't be surprised if the Dow Jones Industrial Average trades in the 13,000-15,000 range over the next two to three years.

Any observer of the market can recite a litany of reasons to be cautious on equities. Leading the list is our hyperactive Federal Reserve Board. Rather than letting the markets be markets -- fulfilling their function of flushing out inefficiencies and imbalances -- the Federal Reserve has adopted a strategy of micromanaging the economy. Only a couple of years ago, the Federal Reserve pushed interest rates to 45-year lows amid angst over the lack of growth and the potential for a deflationary spiral.

Now the Fed is on an unprecedented hike-a-meeting pace in an effort to fight another phantom, inflation. Equity investors should be concerned. Look at 100 years of interest rate history and there is no exception to this rule: Flat-to-inverted yield curves always presage economic weakness, usually a recession. At the current pace of increase, the curve will invert (when short rates exceed long rates) in a couple of months.

In addition to high interest rates and a potentially weaker economy in 2006, there is plenty more to worry about: high energy prices, falling consumer confidence and a costly and seemingly unending war in Iraq. But the key is, by my calculations, that these worries are already discounted in stock prices, and then some.

Raging Undervaluations

In the face of a negative economic backdrop, I'm bullish on the Dow for just one reason: There is a wide gulf between price and value. Of the 30 components of the Dow, 20 have compelling valuations. Later in this column, I'll rate the top 10 buys in the Dow and list the 10 other undervalued components.

Investors get tripped up when they focus solely on nominal stock prices. For example, some might say that Dow component Intel ( INTC ) is materially higher at the current quote of $23.50 when compared with its multiyear low of $13 per share in 2002.

It's true that the nominal stock price is much higher. But the underlying asset, the ongoing business at Intel, is demonstrably more valuable today than when it traded at $13 per share in 2002. Since then, sales are up 75%, net assets are 42% higher, and earnings are up threefold. If Intel trades at or about $22 per share in 2006, it will be bumping up against its 10-year lows relative to the underlying business value.

Another Dow component, Wal-Mart (WMT) currently trades at eight-year lows relative to its business value. For more than 20 years, Wal-Mart has performed like clockwork, more than doubling earnings, net assets and sales every six years. To equate the nominal current quote of $45 per share with a $45-per-share quote of six years ago (the trading range was $41 to $69 six years ago) is nonsense. Wal-Mart's business value has more than doubled in value during that time frame. It was overvalued in 1999. Now it's undervalued.

My valuation calculations indicate a current value of $61 per share for Wal-Mart. I expect that its business value will grow to $69 per share in 2006.

The Dow first traded at the current level of about 10,200 some six years ago. Then it was distinctly overvalued. Now it's undervalued. Business values of nine of the 30 Dow components have doubled in value over the last six years. In addition to Intel and Wal-Mart, business values doubled at:

  • 3M (MMM)
  • AIG (AIG)
  • Caterpillar (CAT)
  • Exxon Mobil (XOM)
  • Home Depot (HD)
  • Microsoft (MSFT)
  • United Technologies (UTX).

    1 of 3

    Select the service that is right for you!

    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!


    DOW 18,053.71 +23.50 0.13%
    S&P 500 2,088.77 +6.89 0.33%
    NASDAQ 4,806.8590 +33.3870 0.70%

    Brokerage Partners

    Rates from

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs