Dow 16,000 in '07

This bull won't tire till long-ignored names like Microsoft and GE break out.
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The Dow Jones Industrial Average has been largely pathetic so far this century. The newspapers will mention all-time highs, but it's only part of the story.

The Dow has been mostly propelled by just a handful of stocks, notably

Altria

(MO) - Get Report

(up 237% since Jan. 1, 2000) and

Exxon

(XOM) - Get Report

(up 120% since then).

But most of the Dow components are still in the severe bear market that started in 2000, despite doubling profits across the board, doubling book value, improving margins and a severe decline in interest rates since then. Price-to-earnings ratios have contracted, despite the increasing earnings stability and the decline in long-term interest rates (which historically has a great effect on P/E ratios).

Twenty of the Dow components are down in the 21st century, many of them in bear market territory (declines greater than 20%) that they have yet to come out of. I do not believe this bull market could "get tired," as many pundits say, until these quality companies climb out of the cellar.

Let's take a look at five Dow components and consider the prospect that their shares might finally break out -- that is, catch up to their improving fundamentals -- in 2007.

Microsoft

(MSFT) - Get Report

, for instance, has seen a drastic decline despite improving every metric in its business. The company is on the precipice of having a blockbuster year in 2007.

Yet the stock is down 45% since the beginning the 21st century, even as book value has gone from $2.78 in the year ended June 1999 to $3.99 now. Price-to-book has plunged to 5.85 from 16. The P/E ratio has gone from 50 to 20.

The market is giving zero credit for the fact that the only profit centers at Microsoft -- Office and Windows -- are about to have their first major releases of the century.

Microsoft

Source: MSN

Intel

(INTC) - Get Report

has increased its book value from $4.88 per share to $6.11 per share, but its P/E ratio has dropped to 17 from 32. Earnings have soared to a record $8.66 billion in 2005 from $1.29 billion in 2001. Net margins slumped to 5% in 2001, but have climbed steadily ever since, hitting 11.6% in 2002, 18.7% 2003, 22% in 2004 and 22.3% in 2005.

Despite all this progress, and the Dow hitting all-time highs, the stock is down over 40% on the century.

Intel

Source: MSN

GE

(GE) - Get Report

has been another great success story -- in terms of the effectiveness of management, if not in terms of the stock price.

GE has increased book value per share to $10.43 in the beginning of 2006 from $4.32 in the beginning of 2000. Net margins are 30% higher, and yet the P/E ratio has slipped to 20 from 36. Apparently the market has no faith that the company can continue to deliver. GE is down 30% since Jan. 1, 2000.

And this is completely,

completely

ignoring the fact that GE has the best new show on TV in the fall 2006 season,

Heroes

. It's followed in the 10 p.m. Monday slot by another great show,

Studio 60

.

General Electric

Source: MSN

Pfizer

(PFE) - Get Report

has come under some heat lately for shelving a potential blockbuster drug, but in general the company has done remarkably well over the past six years and only stands to benefit as the need for health care increases with the aging of the baby boomers.

Net income has jumped to $8 billion in 2005 from $5 billion at the end of the last century. Net current assets have surged to $66 billion from $14 billion in 2000, bringing book value per share to $9 from $2.24. And yet the P/E ratio has contracted to 23 from 50, as the stock has dropped almost 40% since Jan. 1, 2000.

Pfizer

Source: MSN

Wal-Mart

(WMT) - Get Report

is down 20% on the century -- a century that has, in all other respects, been remarkable: Sales have jumped to $312 billion from $165 billion in the past six years, and net income has soared to $11.2 billion from $6 billion. Book value per share has risen for 10 years running, going from $5.80 in 2000 to $12.77 now. What has WMT done to deserve its P/E ratio contracting from 40 to 17?

Wal-Mart

Source: MSN

Most of these stocks could care less about a weak dollar since they are all expanding their international businesses. All of these companies (Wal-Mart in particular) will experience growth regardless of whether or not there is a recession.

Like all things in the market, I expect the negative trends in these stocks to reverse and that 2007 could be a huge year for the Dow as the P/E ratios of these companies get back in line with the gains at these companies and to the current levels of interest rates. I'm expecting Dow 16,000 by year-end 2007 as a result.

At the time of publication, Altucher had no positions in stocks mentioned.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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