Everybody is talking about the fact that the Dow Jones has finally made new historical highs recently, and investors are wondering if the markets have enough fuel in the tank for further increases or if we are due for a pullback at this stage. This is an interesting issue to discuss, but trying to time the markets is in most cases a waste of time, it just can’t be done with enough precision.
On the other hand, looking at individual companies from a long-term investment perspective may be a much more productive idea, and these three Dow stocks have plenty of potential to keep rising.
A Magic Business
Mickey Mouse, Tinker Bell, Snow White, Winnie the Pooh, Tarzan, Pinocchio, Pocahontas Nemo, Hulk and Spider Man are just a few of the world famous names that make The Walt Disney Company (NYSE:DIS) a unique company with truly irreplaceable assets. In addition to the rights to profit from some very famous characters, the company owns brands like ABC, ESPN and Pixar among others.
These may not be tangible assets, but they have very real economic value: The Walt Disney Company (NYSE:DIS) monetizes its intellectual property through different venues like movies, shows, amusement parks, cruises and merchandising among others. The recent purchase of Lucasfilm in October of last year for $4.05 billion ads another fantastic franchise which will generate growing profits at the house of Mickey – and now Darth Vader too – for years to come.
Entertainment spending tends to be quite sensitive to economic cycle, and the movie business is characterized by a high degree of uncertainty since it’s difficult to tell if a new launch will be a big success or a complete miss from a profitability point of view. But The Walt Disney Company (NYSE:DIS) owns an amazing library of content, and the company has proven that it can generate growing sales and earnings through the ups and downs of the economy.
Reporting record sales and earnings figures, while at the same time trading at a very reasonable forward P/E ratio of 14.5, Disney looks well positioned to continue delivering a lot of fun to children, grownups and investors of all ages over the next years.
A Rock Solid Tech Company
The tech industry is one of the most dynamic businesses around. Opportunities for growth can be very exciting, but the winner of today can easily be the loser of tomorrow; so adapting to the new trends is absolutely critical. That’s why having a high quality management team on board can be of utmost importance in terms of positioning the company to thrive in an permanently changing scenario.
Back in 1993, under the leadership of Louis V. Gerstner, International Business Machines Corp. (NYSE:IBM) started an amazing transformation process which not only improved execution and efficiency, it drove the company away from the commoditized hardware industry towards greener pastures in areas like software and services. This produced a spectacular increase in profitability over the years, and it made of International Business Machines Corp. (NYSE:IBM) the undisputed industry leader it now is.
IBM owns the second most valuable brand in the world according to Interband; the company has been around for more than 100 years and counts each of the Fortune 2000 companies as clients. IBM provides a level of soundness and reliability which is quite unusual in the tech industry, while at the same time it’s an active innovator in areas like mainframe servers, proprietary microprocessors, and data storage systems to name a few. At a forward P/E ratio of 11.3, International Business Machines Corp. (NYSE:IBM) is looking quite cheap for such a high quality business.
Building a Recovery
Caterpillar Inc. (NYSE:CAT) operates in a very cyclical industry, which means that investors have been getting concerned about the effects of a weak global economy on the company’s performance. The commodities and mining segment has been showing weakness over the last quarters, and Caterpillar’s management has admitted that the business is facing considerable uncertainties when it comes to global demand in the middle term.
In fact, earnings guidance for 2013 consists of an unusually wide range of between $7 and $9 per share, which reflects the degree of uncertainty surrounding the company. The good news for Caterpillar Inc. (NYSE:CAT) investors is that even under a pessimistic assumption of $7 per share, the current price of the stock under $90 would yield a P/E below of 13, so a negative scenario seems to be pretty much priced in.
Looking at the positive side of the company’s prospects: Caterpillar has an undisputed leadership position in the US construction business, a segment with enormous upside potential in the middle and long term considering that it seems to have already turned the corner, but still well below historical average levels for the industry. If, or when, building comes back to life, Caterpillar Inc. (NYSE:CAT) will one of the prime beneficiaries from that recovery.
Bottom Line
What should an investor do when the market is making new highs? Is it better to wait for a pullback or to buy before prices get more expensive? There is no easy way to answer that question with certainty, since trying to time the market rarely pays off.
Fortunately, there is a better alternative: buying high quality companies at convenient prices with a long term horizon. When a business does well over the long term, investors get rewarded for they patience, so analyzing individual companies is much more productive than paying too much attention to the indexes. Even with the Dow Jones at historical highs, I think these three Dow companies have plenty of room to continue running higher over the next years.
The article Three Dow Companies With Plenty of Upside Room originally appeared on Fool.com and is written by Andrés Cardenal.
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