Intel Corporation Is the Dow's Best Stock for 2014, but It Will Disappoint You Next Year

History shows that the Dow's studs in one year often become duds in the next.

Jul 24, 2014 at 4:34PM

The Dow Jones Industrial Average (DJINDICES:^DJI) seems to be going nowhere fast in 2014. Its year-to-date growth of 3.1% is not only well below last year's big 24% surge, it's also less than half the S&P 500's current 7.5% gain. But hidden in this modest performance is the standard crop of big winners among the Dow's 30 components, and none have come close to Intel's (NASDAQ:INTC) 33% spike since the start of the year. Intel pulled away from the pack over the past month by posting a gains of 14% rise, which is more than double the growth of the second-biggest monthly gainer, and the second-best performer in 2014, Microsoft (NASDAQ: MSFT).

^DJI Chart

^DJI data by YCharts.

If history is any guide; however, Intel shareholders might be in for some disappointment in 2015. We don't have to look back far to figure out why. Last year, Boeing (NYSE:BA) tripled the Dow's gain to become the index's top performer for 2013:

^DJI Chart

^DJI data by YCharts.

Thus far this year, Boeing is the worst-performing stock on the Dow:

^DJI Chart

^DJI data by YCharts.

A year before Boeing took off, Bank of America (NYSE:BAC) led all Dow stocks in its final full year of membership with a rare calendar-year double in share price. Home Depot (NYSE: HD) took a distant second place:

^DJI Chart

^DJI data by YCharts.

Both stocks outperformed the Dow in 2013, but only barely, as they fell back to a pack of monster gainers during a monster year:

^DJI Chart

^DJI data by YCharts.

McDonald's (NYSE: MCD) led all 30 Dow stocks in 2011:

^DJI Chart

^DJI data by YCharts.

But it fell far behind the index in 2012, a year in which it was the third-worst performing stock:

^DJI Chart

^DJI data by YCharts.

And Caterpillar (NYSE:CAT) surged to a Dow-best 60% gain in 2010 ...

^DJI Chart

^DJI data by YCharts.

Only to fall to a loss the following year:

^DJI Chart

^DJI data by YCharts.

Should Intel investors be ready for weakness next year? The following chart should give us some clues as to why one year's studs often become the next year's duds:

Stock (Best Year)

Best-Year EPS Growth 

Best-Year P/E Ratio Change

Following Year EPS Growth

Following Year P/E Ratio Change

Caterpillar (2010)

193%

(44%)

79%

(39%)

McDonald's (2011)

15%

17%

2%

(12%)

Bank of America (2012)

1,350%

Began at negative EPS

255%

(62%)

Home Depot (2012)*

22%

21%

31%

2%

Boeing (2013)

17%

55%

11%

(5%)

Intel (2014)

7%

24%

?

?

Source: YCharts. Boeing data current to midyear 2014.
* Home Depot EPS growth tracked from October of prior year, P/E change is calendar year.

With the exception of Caterpillar, which was coming out of a catastrophic year in which virtually every company in the country reported extremely low earnings, the trend is fairly obvious. Every company here has enjoyed significant valuation expansion during their year of top performance, and the difference in nearly every case (Home Depot held the line in its follow-up year) has been that valuations began to compress in the following year. In multiple cases, EPS growth was solid, but not spectacular, and its investor enthusiasm drove prices higher to a greater degree than any fundamental improvement. These companies didn't stop growing their bottom lines. Investors just stopped flooding into their stocks.

Intel may find itself following Home Depot's path more than that of Boeing or McDonald's. However, it's still very unlikely that the company can put together another impressive Dow-trouncing year in 2015, barring some amazing breakthrough in mobile chips or a massive surge in PC sales that no one expects today. It won't be enough to grow EPS, or even to grow EPS at a faster rate than it did this year. Intel needs investor sentiment on its side, and history has shown that yesterday's big pops tend to become tomorrow's disappointments.

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Alex Planes owns shares of Intel. The Motley Fool recommends Bank of America, Home Depot, Intel, and McDonald's. The Motley Fool owns shares of Bank of America, Intel, and Microsoft. 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.

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