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3 "Dogs of the Dow" that could regain glory in 2018

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It looks so discouraging to see some components of the blue-chip Dow Jones industrial average miserably underperform in 2017, a year the stock market repeatedly chalked up new highs. But it would be encouraging if those names come back and outperform in 2018, demonstrating to investors that they needn't be dropped from the Dow, one of the stock market's globally followed barometers.

It's quite surprising that some stocks would be labeled as "Dogs of the Dow" (with apologies to canines) in this particular year, when the stock market has repeatedly surpassed previous hard-won record advances.

It's inconceivable to many investors that some of the large-cap stocks that compose the Dow industrials should lag the market, given that they're hand-picked for their strength and potential capability to outperform less blue-chip names.    

Three big losers in 2017 among the Dow's 30 components are globally popular brand names that have been around for many years: General Electric (GE), IBM (IBM) and Merck (MRK).

Will they rebound next year and regain their Dow-endowed luster? Some savvy analysts believe they should -- and will.

Shares of GE, the conglomerate that provides products ranging from jet engines and gas turbines to consumer appliances, tumbled from a high of over $32 a share in July to a low of $14 in November, before edging up near $18 in mid-December.

"Opportunity looms for GE, 2017's dog of the year, as it tries to do all the things a company in a free-fall does: Reduce the number of employees, sell assets, slash costs and its dividend," said market analyst George Brooks, who writes the daily blog Investor's First Read. No wonder GE CEO John Flannery Jr. calls it GE's reset year.

"The big names always seem to find a way to come back," Brooks noted, pointing out that more than half of GE's 43 percent stock price drop occurred in the latter part of the year. "GE needs to streamline its power, renewable energy, oil and gas, aviation, health care and transportation businesses," suggested Brooks, "to become profitable."

Jim Corridore, equity analyst at CFRA Research, who rates GE a "hold," noted that the company has "struggled with poor execution and demand shifts." But he doesn't think its overall strategy to cut costs and refocus on areas of strength is enough.

"We still feel GE has great assets and technology, but we think the company faces a long drawn out restructuring, and it's best to wait for signs of improvement before adding to positions." Corridore has a 12-month price target of $22 a share.

In IBM's case, Brooks noted that the company "has failed to post a share-price gain in four of the last five years, with 2016 a rare exception." That year it rebounded from $121 a share in February after a three-year, 46 percent swoon. The stock is now trading at $152, down 8 percent for 2017.

Brooks said earnings are expected to be flat in 2018, "but that's not its appeal," he said. "Its supercomputer, Watson, which has open-ended potential, is clearly the wave of the future in a world where automation, computer solutions and artificial intelligence stand to revolutionize how business is done, how we live our lives."

David Holt, equity analyst at CFRA, rates IBM a "buy," with a 12-month price target of $175 a share. "While investor sentiment remains largely fixated on top-line declines, we think third-quarter results confirmed the idea that a redefined trajectory remains feasible," he said.

"In our view, IBM has established line of sight toward near-term goals ($13.80 for 2017 operating earnings per share) and has the necessary levers to pull for longer-term stabilization," the analyst pointed out. "We think the risk-reward trade-off is favorable at current levels," argued Holt. 

With regard to Merck, the stock has had a free-fall, diving down from $66 a share in September to a low of $53 in early  December. It has since edged up to around $56. Merck, which has the blockbuster cancer drug, Keytruda, has an "exciting pipeline" and should vie for a prize as a huge winner in 2018, said Brooks. 

Keytruda won the Federal Drug Administration's approval in October last year for the first-line treatment of non-small-cell lung cancer, "and we see it establishing a large market share as the only approved immune-oncology drug in the first-line setting in the US," said Jeffrey Loo, equity analyst at CFRA. He rates the stock as a "hold," with a 12-month price target of $60 a share. But Loo sees Merck's withdrawal of its European application for Keytruda in combination with chemotherapy as a setback.

A leading global drugmaker, Merck produces a wide range of prescription drugs in many therapeutic classes in the US and abroad. Its largest-selling products include Januvia/Janumet, with sales of $5.9 billion in 2016, up from 2015's $6 billion. It's a treatment for type 2 diabetes. Another top seller is Remicade, an anti-inflammatory drug with sales of $1.27 billion in 2016, off from $1.8 billion in 2015.

Merck is also a leading maker of key vaccines, including ProQuad for measles, mumps and rubella, and the Gardasil vaccine for human papilloma virus, the main cause of cervical cancer.

So these three 2017 Dogs of the Dow should bounce back and recover part if not all of this year's losses in 2018. That's partly because of how much they've fallen -- and how much more determined they've become to escape being branded again with that not-so-flattering title.

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