Give me one stock that would survive if we hit Dow 5,000 and one that would thrive if we hit Dow 15,000.
That was the question we posed to a group of Fool.com writers two and a half years ago, just as the Dow Jones Industrial Average crossed 10,000 again. This week, after the Dow closed above the 13,000 mark for the first time in four years and hit an all-time high when adjusted for dividends, it's time to check in on those picks.
Dow 15,000: Sirius XM, Dow 5,000: Netflix
Both of my picks did amazingly well, though I'm assuming that's a mixed showing since the market could only wind up higher or lower.
Sirius XM Radio (Nasdaq: SIRI ) -- my pick for Dow 15,000 -- has soared 260%. The stock's high beta has served the satellite radio service provider well as investors buy consumer-facing companies during this painfully gradual economic recovery. It has only helped that Sirius XM is now a very profitable company oozing buckets of free cash flow.
I still stand by Sirius XM if the Dow does ultimately hit 15,000. The move will indicate that consumer confidence is growing, and that will likely accompany a boost in car sales -- satellite radio's biggest source of subscribers.
Netflix (Nasdaq: NFLX ) was my selection for surviving a Dow plunge to 5,000. Despite the stock's perilous plunge since peaking this past summer, shares are up 134% since our original roundtable. Netflix proved its recession-resistant ways by appreciating in 2008 and posting heady growth as couch potatoes gravitate toward the DVD and streaming service.
I remain a Netflix investor, but I no longer see it as a safe play for the Dow at 5,000. Netflix is shedding DVD-based subscribers, and its growing streaming business is far more competitive these days. Netflix is no longer the only streaming smorgasbord in town, and less thorough rivals are even cheaper. If I needed a strong growth company that could withstand the financial collapse that would come with the Dow plummeting to 5,000, it would be SodaStream. Making soda at home for out-of-work refreshment seekers seems like both a worthy morale boost and a way to avoid stiff tabs at the grocery store.
Dow 15,000: Intuitive Surgical, Dow 5,000: Johnson & Johnson
While the market hasn't exactly hit 15,000, it's produced solid returns of about 25% since our original roundtable. Intuitive Surgical (Nasdaq: ISRG ) has taken the wind at its back and flown (up almost 100%), while Johnson & Johnson (NYSE: JNJ ) -- its defensive greatness unneeded -- has meandered along just above breakeven, lagging the rest of the market. Once dividends are factored in, though, its return was closer to 15%.
But what about the next leg ahead toward Dow 5,000 or 15,000? While I tend not to think about my investing in those terms, I don't think there's a pressing need to change my previous picks. If the market does keep charging ahead toward 15,000 -- which also implies that the economy continues to improve -- Intuitive Surgical should continue to do well. Of course, you can probably point randomly at a hot growth stock and see tasty gains -- on average, growthy, non-dividend-paying stocks tend to outperform stodgier dividend payers during bull markets. I would imagine that Rick's picks would do really well under that scenario as well.
And if Mr. Market sees his shadow and retreats? There are few stocks I'd feel safer owning in that scenario than good ole J&J.
Dow 15,000: Philip Morris International, Dow 5,000: Coach
After returning more than 80% since I recommended in it in 2009, Philip Morris International (NYSE: PM ) shares are a little pricey at these levels. I still own the shares, and will for some time, but it'd be hard to recommend buying at current prices. Its current dividend yield of 3.7% is one of the highest you can find among large-cap companies, but it's low compared with what Big Tobacco stocks typically yield. Any reversion to the mean could leave investors disappointed.
Coach is still a great company and riding a bifurcated economy that's producing a growing number of affluent consumers, but it, too, isn't exactly cheap. Both Philip Morris and Coach were great stocks to buy three years ago. Whether they will be great buys over the coming three years is a different story, and one that investors shouldn't be overly confident about.
But what about Dow 15,000? I think it's a reasonable number to consider. The S&P 500 (a better index) currently trades at about 13 times earnings. If earnings grow at some sensible level, say 5% a year, Dow 15,000 is a realistic target within the next two or three years. That isn't a forecast -- anything can happen -- but it's more plausible than some think.
Rick Munarriz owns shares of Netflix. Matt Koppenheffer owns shares of J&J. Morgan Housel owns shares of Philip Morris International and Johnson & Johnson.
The Motley Fool owns shares of Johnson & Johnson, Coach, and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International, Intuitive Surgical, Netflix, Johnson & Johnson, SodaStream, and Coach. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.