Jim Cramer's Top Dow Picks for 2011
Editor's note: This is an excerpt of Jim Cramer's Dow 30 predictions.
People do a lot of top-down analysis at this time of the year, trying to figure out how much the Dow and the S&P could go up — or down — in the coming year. That's not my style. As someone who is a stock picker, I like a bottom's-up approach, analyzing each Dow component to come up with what I think the most visible index will deliver in 2011.
I expect the Dow to hit 13,365 next year — a 16% gain from current levels and a bountiful return — based on a prognostication of the performance of the individual members of the venerable index.
Although I am a bottoms up guy, as a backdrop I am presuming a resumption of decent U.S. growth courtesy of the Federal Reserve — call it 3% to 4% — continued worldwide growth, a stable-to-slight decline in the dollar and a decent increase in interest rates (30-year Treasury bond going to 4.8%) as befitting a return to economic health.
But I see the Dow's terrific gains coming mostly from the players themselves. Here are my individual stock predictions that add up to 13,365 for the index.
Alcoa: Let's start off with a bang. With just a $14 billion market cap — and being the leading independent producer of a metal that will be in intense demand in 2011 because of boosted aerospace, autos and power plant production — Alcoa will be hard-pressed to stay independent. Earnings have been depressed throughout the downturn, but the cash flow has picked up, courtesy the excellent stewardship of CEO Klaus Kleinfeld.
If the company stands alone, its stock can advance and get a 12 multiple, a slight discount to many of the cyclical stocks in the average, and that would put it at $18. But I think it gets bought out at $22, a fabulous return and perhaps my favorite in the whole average.
Bank of America: The bank will settle the mortgage putback claims, put a lot of its bad mortgage loans behind it and have an assertive Merrill Lynch to boost its earnings.
I think that this company, which trades basically at its cash value, will have a terrific year, especially because CEO Brian Moynihan should be growing into his role and become more of a spokesperson that can help this riddled brand.
Next: "The housing shortage of 2012."
The integration of the three companies, original Bank of America — itself a pastiche of many banks including Nations and Fleet, where Moynihan's from — Countrywide and Merrill Lynch will finally be consummated in 2011. Glorious.
Don't forget that despite all of the turmoil, Bank of America now has an unheard-of 20%-plus market share in the nation's mortgage market, and I think that market will come alive as the housing shortage of 2012, another of my predictions, comes about. I see this stock trading at $18, where it stood not that long ago, a terrific gain.
Boeing: The Dreamliner schedule should solidify at last and even if Boeing produces just a few of these mammoth and insanely profitable planes, the stock will soar along with them. Production is key to this company because once it gets the cost down per plane — something that happens as it makes more and more of them — then the gross margins explode.
I think that this stock could trade to $85 by year end because it is then inconceivable that the Dreamliner isn't being sold.
Don't forget that aerospace makers have had seven-year cycles in the past, so I don't expect the stock to stop rallying in 2011. Lots of growth here for certain, and perhaps the most long-term visibility in all of the Dow.
Caterpillar: This stock could be a monster in 2011, especially with the integration of Bucyrus , which I think will turn out to be a fantastic acquisition. Estimates, currently showing EPS at about $6, I think are way, way too low.
I see this stock going to $120 in the next year. Too gutsy? Ask yourself what happens if the United States comes back as a growth nation. Right now almost all of the growth is overseas. Still a fantastic mineral play and a terrific call on world growth.
Chevron: I see oil going to $100 a barrel in 2011 given the expansion of the world's economy. Chevron is very levered to the price of crude — much more than Exxon — and I see it outperforming its peers. Nevertheless, those who bought it because of its yield will, of course, be left high and dry as I think it can go to $110 on the strength of the oil price and a very aggressive plan to produce more oil. Just a great solid stock to own in 2011. Maybe the best management in the industry, too.
Next: "Still the best-run bank in America, if not the world."
Coca-Cola: Growth is back and this fantastic company will shine in 2011. I think that the aggressive nature of management and the worldwide prospects for more sales, plus a turn in Japan, will mean a stock that rallies through the year, although not at the pace that Coke once thrilled us at. Then again, that was 20 years ago, and this is a very mature growth stock.
I think it can trade to $70, not bad considering the safety of the enterprise. More dividend boosts ahead and an aggressive buyback should also help the cause as the bottler buy will be behind them. I like this stock very much for those who seek a nice return with low risk.
Home Depot: It is clear to me — if only me — that housing will mount a comeback in 2011. Home Depot doesn't even need it, as we saw this year with its remarkable 23% return despite housing weakness. A lot of that is CEO Frank Blake, who has done a masterful job turning the company around. I see bigger ticket items finally being sold in far greater numbers — where the margins are — and comparable store sales better around the country.
People think the company can deliver EPS of $2.25. I think that's too low. Maybe $2.30 is more like it, given the endless small boosts. Why can't it trade to $45 on that and the housing shortage I see coming in 2012. Another great year for Home Depot coming up.
JPMorgan Chase: The dividend's going to be boosted, the buyback enlarged, the earnings power revealed, the shroud gone. JPM's still the best-run bank in America, if not the world, and CEO Jamie Dimon is one of our greatest bankers. The company really did come through this period relatively unscathed and with a better branch network, courtesy the dirt-cheap price of Washington Mutual.
This company's stock has done nothing, literally nothing, year over year. Unchanged! That won't be the case in 2011. I see it going to $50 propelled by earnings power and the dividend hikes. It will be the preeminent financial to own and become a staple of many a mutual fund's portfolio. Call it $50.
3M: The disappointing analyst meeting and the negative previous quarter haunt this stock going into 2011. But if you are like me and believe there will be worldwide growth, you would be nuts not to consider buying this 13% grower for just 15 times earnings.
3M's got so much going for it in Asia and has so many new businesses — it remains the most potent inventor of new products among the major companies I follow — that I think it will drift back up to its 52 week high of $91 if not higher. Perhaps $100, which I think is my stretch goal given its $6.16 in composite EPS estimates.
Why $100? I think the dollar gets weaker and this is one of the most sensitive companies to the greenback which means that $6.16 could be too low. Cheap stock that's in the penalty box because of the ever so slight shade down of earnings, a shade down that, when I analyze the company, is something that will be left behind in 2011.
Next: "One of the best risk-reward profiles we've got."
Verizon: This is Verizon's year. The iPhone's coming in quarter one, which will lead to a growth spurt. The FIOS build out is largely paid for, and now the company can reap the benefits of the spend. The company's half-owned portion of Verizon Wireless will be paying some hefty dividends in 2011, and I think we will get a nice dividend boost.
We're talking about the possibility of $40 being reasonable, if conservative, giving this stock one of the best risk-reward profiles we've got in the Dow or the S&P 500 for that matter. CEO Ivan Seidenberg has done a remarkable job turning this staid company into a growth vehicle with a nice dividend. It will be a core holding for many mutual funds.
Check out Cramer’s full Dow 30 predictions.
Cramer holds Alcoa, Bank of America, Boeing, Caterpillar, Coca-Cola and JPMorgan in his Action Alerts Plus charitable trust portfolio.
— Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO. He is also the host of CNBC's "Mad Money" show.