3 Dow Stocks To Buy, 3 To Avoid

At times like these, when investors are nervous, many will flee to the safety of the biggest, best-known stocks.

The 30 stocks in the Dow Jones Industrial Average fit that description. They are chosen for the index specifically because they are industry leaders.

Investors have reason to be skittish at the moment. Russia is brutally invading Ukraine. Inflation has kicked up. In an effort to damp down inflation, the Federal Reserve has signaled that it will raise interest rates several times this year.

Some of the stocks in the Dow are better suited to withstand these developments than others. Here are the Dow’s best and worst performers this year through March 25, based on total returns including dividends.

Best:

• Chevron (CVX), up 46%
• Travelers (TRV), up 21%
• American Express (AXP), up 17%
• Dow (DOW), up 15%
• Caterpillar (CAT), up 9%

Worst:

• Home Depot (HD), down 25%
• Nike (NKE), down 20%
• Salesforce.com (CRM), down 17%
• 3M (MMM), down 14%
• Cisco Systems (CSCO), down 13%

Today, I’d like to tell you about my own preferences among the Dow Jones Industrial Average stocks. Here are three that I like, and three that I would avoid.

My Choices

Apple (AAPL) is down a little more than 1% this year, but I wouldn’t let that discourage me. With its fortress balance sheet and loyal entourage of iPhone users, I think the company will keep doing something close to what it has done for the past five years.

That would mean earnings growth in the neighborhood of 18% and sales growth of about 15% a year. As it matures, Apple may also have dividend appeal. It started paying a dividend in 2012, just a dime a share. It has raised the dividend each year since, to 87 cents a share lately.

Chevron (CVX) has jumped 42% in price this year, the price for a barrel of oil has climbed from about $76 to about $110. Is it too late to buy? I’d say not, since this stock is making up for lost time.

Over the past ten years, while the Dow Industrials returned 235%, Chevron has returned only 140% (mostly through dividends).

There are smaller energy companies that I like more than Chevron, but if you want a big company with a high dividend yield, this is a good bet. The company has a good reputation for finding new oil deposits and replenishing its reserves.

Walt Disney Co. (DIS) has been the eighth-worst performer in the Dow year-to-date, down 10%. But it’s not really hitting on all cylinders at the moment. The pandemic has hurt movie-theatre attendance, Shanghai Disneyland is closed, and other Disney parks are only now approaching 2019 attendance levels.

The rapid success of the Disney+ streaming service shows that people want the company’s brand of family entertainment. Launched in late 2019, the service already has about 43 million subscribers in the U.S. and about as many internationally.

What I’d Avoid

Salesforce.com (CRM) has two problems. The obvious one, which the financial press has focused on, is that it projected slightly lower revenue for 2022 than analysts had expected.

The more subtle, but more profound, problem is that rising interest rates pose a threat to richly valued stocks. Suppose you expect Salesforce to earn $10 a share in 2027. What is that worth? Well, the present value of $10 a share five years from now is $9.05 if you discount by 2% a year, but only $7.47 if you discount at 6% a year.

That’s why many technology stocks—and high-expectation stocks in general—have had a rough time the past few months. Much of their value lies in the future. Salesforce sells for 140 times recent earnings and 45 times the earnings analysts expect in the next four quarters. Therefore, it’s out on a limb.

Nike (NKE) has a similar problem to Salesforce, though not as extreme. It sells for 35 times recent earnings and 29 times projections for the next four quarters. That’s high, considering that earnings grow at 5.6% the past five years.

Coca-Cola Co. (KO) enjoys a reputation as a growth stock. For years, that reputation was well earned. But Coke’s revenue growth has been slightly negative for the past five years, and for the past ten years.

Coke’s profitability looks strong by several measures, but not by my favorite measure—return on invested capital. The company’s debt was less than stockholders’ equity (corporate net worth) until 2012 but has crept up since. Lately, debt is 186% of equity.

Disclosure: I own Apple and Disney personally and for most clients. One or more of my clients own Chevron and Home Depot. A hedge fund I run (and invest in) owns call options on Cisco.