The Dow Is Setting Its Sights on 13,000

Several Dow stocks can be purchased today at a hefty discount and, importantly, these assets will be worth even more over the next few years. I expect this basket of four Dow stocks will return 50%-75% to the investor over the next three to four years:

Wal-Mart (WMT Quote): This one is easy, as the business value doubles like clockwork every six years. There is very little operational variance in this model and no serious competitor with the girth to challenge its procurement, purchasing and distribution advantage. Investors are making a mistake if they overlook the growth opportunities extant for this model. Even if I ratchet down growth expectations a bit, I still calculate a $75-$80 value in three to four years, or 67% above the current $45 quote.

Microsoft (MSFT Quote): This stock traded as high as $60 a share in 1999 in the midst of the tech bubble, when the business was worth $18 a share. Since 1999 the business has grown in value to $29 a share. Using modest growth estimates, the value will grow to $40 or more a share in three to four years. That's 60% above the current quote of $25 a share. There's a chance that $40 a share may prove conservative, especially if the company uses its ample cash position and free cash flow to aggressively shrink the share base.

Boeing (BA Quote): Investors have several levers working for them that will unlock value in Boeing stock over the next few years. Commercial aerospace demand will be robust for many years to come, particularly in Asia, where Boeing has a strong foothold. Airbus lacks the capital to develop a serious alternative to Boeing's 787, which is set to be rolled out in 2008. New CEO James McNerney took an already efficient profit machine in 3M (MMM Quote) and made it even more efficient. Boeing should produce big earnings gains over the next three to four years as McNerney works with Boeing's significant operating margin leverage. Expect at least $110 a share over the next three to four years, or about 70% higher than the current quote of $65 a share.

Home Depot (HD Quote): This is another one of the elite companies in the current Dow with operating metrics that retailers of a generation ago, e.g., Woolworth, couldn't touch. Expect at least $62 a share in three to four years, or 55% above the current quote of $40 a share.

In addition to the four mentioned above, other exceptional values in the current Dow Average include Intel (INTC Quote), American International Group (AIG Quote), General Electric (GE Quote), Citigroup (C Quote), and out-of-favor pharmaceutical companies Pfizer (PFE Quote) and Merck (MRK Quote).

There are at least 11 more Dow stocks that are undervalued relative to their prospects for the next business cycle: Altria Group (MO Quote), Hewlett-Packard (HPQ Quote), American Express (AXP Quote),3M (MMM Quote), Coca-Cola (KO Quote), McDonalds (MCD Quote), JP Morgan (JPM Quote), Disney (DIS Quote), Johnson & Johnson (JNJ Quote), IBM (IBM Quote) and Procter & Gamble (PG Quote).

Top Ten Turnarounds for 2006

In mid-November I'll begin my series Top Ten Turnarounds for 2006 for RealMoney. In a difficult market environment, terrific turnaround opportunities abound. I've done two previous lists, for 2001 and for 2002. I hope you will consider the Top 10 Turnarounds list as a source of stock ideas. If you simply bought and held the list for 2001, you would be up 102% vs. an S&P 500 decline of 13%. If you simply bought and held the list for 2002, you would be up 48% vs. an S&P 500 increase of 2%. Interestingly, nine out of 10 stock ideas on each list have outperformed the S&P 500.