Top Techs and Dow 18,000

05/01/2014 7:00 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

The Dow is trading at a P/E of 16; that is below the valuation levels we saw between 1992 and 2007, which makes it hard to claim that the market is overvalued, explains John Dessauer, editor of Dessauer’s Investments.

As we get more data on job creation and economic activity, investor sentiment is likely to improve.

Earnings per share is growing. That growth is due, in part, to a reduction in shares outstanding as more and more companies buy back shares.

In addition, there is reasonable sales growth. Normal operating leverage results in earnings growth that is somewhat faster than sales growth.

Consumer confidence and investor sentiment usually go in the same direction. A modest boost in the P/E to 18 would lift the Dow to 18,000 based on current earnings.

Can earnings per share grow 10% this year? The answer is yes, because global trade is growing, and the rate of growth is likely to increase modestly this year.

The bottom line is that Dow 18,000 is achievable without dramatic changes in the rate of economic activity or the pace of global trade.

A combination of improved investor sentiment and earnings per share growth will lift the Dow to 18,000 by the end of this year. If a real correction comes along, it will be a buying opportunity.

Meanwhile, we’ve see some very good news about technology giant Microsoft (MSFT). Last month, the new CEO, Satya Nadella, announced a Microsoft Office app for Apple’s iPads. Right on schedule, Office for iPads was announced on March 27.

Analysts were quick to start making calculations about what this could mean financially for Microsoft. One calculated an annual revenue stream of $1 billion to $1.5 billion a year if 10% of iPad owners bought the Microsoft Office app.

Another analyst said the launch would signal that Microsoft is moving towards a more serious cross-platform strategy. For months, there have been repeated warnings from Microsoft bashers about the death of the PC and Microsoft’s loss for being so late to get involved in mobile devices.

All of a sudden, sentiment reversed. This should not be a surprise. The previous bashers were ignoring Microsoft’s strengths. My 12-month stock price target of $45 is looking good. Microsoft is a buy.

I also see good news from Texas Instruments (TXN), where management is committed to enhancing shareholder value by generating free cash flow that would be used to pay dividends and buy back shares.

After announcing a strong final quarter for 2013, management said the company would generate free cash flow equal to 20%-25% of revenues.

That calculation has been amended. The new calculation takes into account cash received from employees exercising stock options. This increases the free cash flow expectation to 20%-30% of revenues. Texas Instruments is a solid long-term investment. My buy target is $40.

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