Stay Away From the 3 Biggest Losers in the Dow
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The Dow Jones Industrial Average was one of the modern world’s first market indicators. Today the price-weighted index is comprised of 30 large publicly-owned companies based in the United States. Year-to-date the blue chip index has returned 11.02% to shareholders, while the S&P500 has returned 16.03% and the NASDAQ has returned 21.98%. While the Dow as a whole may not be doing well, there are three companies within the index that are dragging it down even further with their poor performance.
Hewlett-Packard (NYSE: HPQ)
Hewlett-Packard has been the worst performer on the Dow year-to-date. The personal computer company has lost 29.15% of its stock value since the start of 2012. The combination of phones, tablets, increased competition, and poor economic conditions have hurt PC sales for Hewlett Packard (See if Hewlett-Packard can compete with Apple and Google). Looking at its valuation, the company is trading at 0.30 times sales, only one-third of their five year average P/S of 0.9. Moreover, the PC company has an EV/EBITDA of 3.92.
Hewlett has grown revenues at a five-year compound annual growth rate (CAGR) of 6.8%, but it has had a disappointing 2012 thus far. Revenues have declined and expenses as a percentage of revenue have gone up. Both SG&A and R&D have increased, causing operating and profit margins to compress. The PC company plans to combat any lost sales by penetrating the business-class tablet market. If HP can fill an unmet need for tablets and laptops in the business niche, it can continue to be a major player in the tech sector.
McDonald’s (NYSE: MCD)
With a year-to-date return of -7.23%, McDonald’s is the second worst performing stock on the Dow. The largest fast food restaurant in the world faces strong headwinds that may adversely affect its financial health going forward. Austerity measures in Europe, higher commodity costs in the U.S., and slowing growth in Asia all leave investors unsure about McDonald’s ability to grow.
From a valuation standpoint, McDonald’s trades at a 17.1 times earnings, and has an EBITDA of 10.45. McDonald’s has grown revenues at a five year CAGR of 4.6%, has an ROA of 15.87%, and has an ROE of 37.93%.
McDonald’s has been a successful and growing fast food restaurant for years, and with strong partnerships with franchisees and suppliers, enormous size and scale, and a solid understanding of their customers’ wants and needs, McDonald’s could rebound in the second half of 2012 (See if mergers and acquisitions are in the horizon for McDonalds).
Boeing (NYSE: BA)
Although the company is doing better than McDonald’s and Hewlett-Packard, Boeing’s stock price has shrunk 3.95% year-to-date, the third worst return among companies listed on the Dow. Investors are uncertain about the impact of the proposed European Aeronautic, Defense & Space acquisition of BAE Systems will have on Boeing. If the acquisition goes through, the new entity (which would include rival aircraft developer Airbus SAS) would become a larger threat to Boeing and would have a better presence in the U.S.
Other looming threats to Boeing include competition arising in its commercial segment and government spending cuts impacting its defense segment. One example of some new competition stealing market share is the battle between the new Boeing 737 Max and the Airbus A320neo. The 737 series are known for being the best selling airliners in the history of aviation, mainly due to the fact that they are shorter and cheaper than their competition. However, the Airbus A320neo was released roughly one year before the Boeing 737 Max. This has given the A320 a healthy head start in front of the new 737 Max.
Looking at the valuation, Boeing trades at 12.18 times earnings and has a 6.82 EBITDA multiple. Boeing has grown revenues at a five year CAGR of 2.2%. It has an ROA of 5.05%, and an ROE of 81.60%.
Boeing’s backlog has grown to more than 4,000 planes, and the air travel business is picking up. The company sold more planes in the past quarter (ending June) than over the same time last year, and is regaining market share from Airbus. Boeing had a rough takeoff for 2012 and has been hitting turbulence ever since, but it has strong products and a sturdy brand name that should help it remain a powerhouse in the aircraft industry.
What do hedge funds think?
The value of Hewlett-Packard shares held by hedge funds increased nearly $220 million during the second quarter of 2012, in spite of six hedge funds liquidating their shares of HPQ. Hedge funds also didn’t like the taste of McDonald’s in their portfolios. While five hedge funds dropped McDonald’s stock during the second quarter of 2012, the total value of McDonald’s held by hedge funds increased by $230 million.
Looking at Boeing, 32 hedge funds owned shares of the airplane developer in both the first and second quarter of 2012. The value of the shares held by the funds decreased $40 million during the second quarter of 2012.
Taking into account that there hasn’t been a drastic shift in hedge fund holdings for the three worst blue chip stocks listed on the Dow, we expect one of two things: (1) that funds don’t want to sell their shares at bottomed out prices, or (2) they believe that a turnaround is in store for the remainder of 2012. For a complete look at the hedge fund industry’s sentiment toward these stocks, continue reading here.
This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.