The Dow Jones Industrial Average (DJIA) is clearly in fighting shape. The heavyweight index has already pounded out 17% gains this year, on top of gains of 10% to 11% in 2010, 2011 and 2012 as well.
Yet a quick look at what's not working in the Dow gives a glimpse of the index's weak points. Four of the Dow's 30 stocks are lagging behind the broader index by a wide margin. Yet only one of those can simply be seen as having an off year due to cyclical economic factors. The other three simply lack the strength and stamina to duke it out for the long haul, and you might want to reconsider their place in your portfolio.
The four big laggards:
|1. AT&T (NYSE: T)|
Ma Bell's shares were generating a small loss for the year before the recent Washington fiscal agreement pushed it slightly into the black. If the market retreats from the current euphoria by year's end, AT&T will surely end up posting a down year.
In fact, short sellers are anticipating such a move. As I noted last month, both AT&T and Sprint (NYSE: S) have seen rising short interest in recent months. And during the third quarter, the short interest in AT&T rose yet further, to 126 million shares, making it the second most heavily shorted stock on the N.Y. Stock Exchange, behind Bank of America (NYSE: BAC). AT&T is caught in a vise between declining landline exposure, a weak competitive hand in the wireless space, and possible technological obsolescence.
|2. IBM (NYSE: IBM)|
Big Blue just delivered its sixth straight quarter of declining revenues, pushing its shares down to fresh multi-year lows.
What's wrong with IBM? The company is no longer at the vanguard of technology trends such as cloud computing and Big Data, and it's increasingly seen as a back-office technology manager handled by legions of staffers in India. Management appears more intent on boosting earnings per share (EPS) through cost cuts and stock buybacks than through organic sales growth -- and that's a recipe for further long-term irrelevance.
|3. Exxon Mobil (NYSE: XOM)|
This lumbering oil giant only recently moved back into the black for the year, thanks to Washington budget Band-Aids, but as I noted recently, serious challenges for this company remain.
Analysts expect revenue to drop 8% this year, to around $443 billion, and it's highly unlikely that Exxon Mobil will ever again be seen as a solid revenue growth story -- no matter the economic climate.
|4. Caterpillar (NYSE: CAT)|
At first glance, this industrial conglomerate looks to be ill-suited for the Dow's forward-thinking index makeup. Shares traded for $88 on Oct. 21, 2011, and two years later, are slightly lower.
Yet in this instance, timing is everything. In fact, Caterpillar has very strong exposure to the most dynamic themes set to play out in coming decades:
In a 2012 interview citing China's infrastructure spending, Caterpillar's head of China operations, Richard Lavin, noted that "roads, bridges, airports, sewage systems, energy -- all of these are areas that we play in, it's the core of our business," adding that "I think we can expect a fairly broad and significant impact across our business." Caterpillar remains as one of the few companies in the world with the capability of providing all the gear needed in major infrastructure projects.
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We're in the pent-up phase of spending on mining equipment right now, but an upgrade cycle into mid-decade appears inevitable, even if commodity prices don't move back up to previous peaks.
Risks to Consider: As the Dow has risen sharply in recent years, the index may need a breather, which would likely limit the gains for any of these Dow components.
Action to Take --> When it comes to stock selection in the DJIA, bottom-fishing can prove to be fertile. I noted Boeing's (NYSE: BA) recent underperformance last month, and since then shares have more than doubled.
Boeing and Caterpillar share a key trait: Each company was (or is) suffering from concerns about current quarterly sales trends and ignoring the bigger picture. The big picture does indeed look challenging for IBM, Exxon Mobil and and AT&T, but Caterpillar still ample has ample room for growth in the years ahead. Underperformance in 2013 simply spells opportunity for long-term investors.
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