Stuart Shaw, CFA

In July 2007, I put the Dow Industrials on Fast Track, and concluded that, “If the Dow were a stock, it failed my 3-category rule, and I would pass.” The Dow is down 7.4% from last July and 5.9% year-to-date at the time of this writing.

Fast Track is a screening tool that focuses on 10 key categories incorporating the balance sheet, cash flow, earnings, valuation, and how management and the Street feel about the stock under consideration. I get interested in doing more extensive research using the entire Company Stock Risk Profile research process if a stock fails no more than 3 categories.

The Dow on Fast Track is a bottoms-up quick study of the Index and its components, and may also uncover a few ideas that may be worth your time for in-depth research. Here’s the Dow on Fast Track today:

1. More cash has been showing up on balance sheets. Cash and cash equivalents and short-term investments totaled $400.8 billion for the Dow companies at the end of this year’s first quarter, as compared with $301.3 billion a year ago. Excluding the 4 financial stocks in the Index, these same numbers were $248.8 billion and $209.5 billion, respectively. Moreover, 26 companies had stable or growing cash and cash equivalents and short-term investments on their balance sheets, up from last year’s Fast Track total of 15.
2. Long-term debt as a percentage of total capital for the Dow companies averaged 33.6% at the end of this year’s first quarter, excluding General Motors, which had negative total capital. Last year, the average was 35.2%, and 32.6% without General Motors. Fast Track favors companies with debt to total capital of 20% or less. Nine companies had percentages below 20%, 1 less than last year’s Fast Track.
3. Despite a tough economic environment, most Dow companies have been posting healthy cash flow. In 2007, free cash flow (cash from operations less capital expenditures) for all 30 companies came in at $86.7 billion, down from $114.1 billion in 2006. However, excluding the financials, free cash flow was $235.7 billion, up from $160.4 billion in 2006. This year’s first quarter is starting out on an equally strong note (without the financials) at $54.5 billion, as compared with $32.1 billion a year earlier. Twenty-five companies had stable or growing free cash flow, 5 more companies than last year’s Fast Track results.
4. But there were more earnings disappointments. Fourteen companies reported earnings that were below Street estimates in at least 1 of the last 4 quarters, 6 more than last year’s Fast Track.
5. Street analysts have been cutting earnings estimates for 11 companies versus only 3 a year ago. Last year’s optimism may be waning.
6. Only 5 stocks passed Fast Track’s 2 valuation measures. Last year, 12 stocks passed.
7. While managements remain overwhelmingly net sellers, they were somewhat more positive about their companies’ stocks. There were 7 companies where insiders were net buyers in the last 6 months. Home Depot stands out with net purchases of 5.7 million shares. Last year’s Fast Track turned up only 1 stock, Coca-Cola, with net purchases.
8. The majority of Street analysts continue to like the Dow stocks. Sixty-seven percent of the analysts following 21 Dow stocks are recommending their purchase. The remaining 9 stocks have the buy support of 41% of those analysts covering them. Fast Track gives higher marks to these 9 stocks, which have more room for ratings upgrades.

The average of all 30 stocks failed 4.3 out of 10 categories, as compared with last year’s 4.5. If the Dow were a stock, I would pass again since it would have failed my 3-category rule.

But the Dow is comprised of individual stocks, and Fast Track uncovered 11 potential ideas that are worth a closer look: 3M (MMM), Altria (MO), American Express (AXP), Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), Hewlett-Packard (HPQ), Johnson & Johnson (JNJ), Microsoft (MSFT), Pfizer (PFE), and Disney (DIS), all having passed my rule of failing no more than 3 categories. Altria, Coca-Cola and Hewlett-Packard each failed 2.

Fast Track is a research tool for quickly and easily screening stocks for ideas. The 11 stocks cited above may or may not be good ideas. So whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen.