Well, the first quarter of the year has been interesting, to say the least. Markets kicked off 2016 on a steep downtrend and suffered the worst 10-day start to a year ever. The Dow Jones Industrial Average alone shed 1,437 points, or 8.2%, in those first 10 trading days.
Thankfully, the markets have since recovered.
Rebounding oil prices, a relatively dovish Federal Reserve and some recent weakness in the dollar have helped stocks fight back to breakeven. It’s safe to say that many investors are more confident than they were a month or two ago … but they still remain cautious.
With a tumultuous Q1 now in the books, let’s take a look at 10 of the best Dow Jones stocks to buy for Q2.
Best Dow Jones Stocks to Buy: Cisco Systems, Inc. (CSCO)
Investors should use the extremely bumpy environment we saw on Wall Street in the first three months of the year to inform their investment decisions in Q2.
I think financially sound large-cap value stocks will outperform other equity groups as investors become more risk-averse. We’ve already seen this “risk-off” mentality play out as 10-year treasury yields fell from 2.24% to about 1.9% and the price of gold rallied above $1,200 an ounce in the first quarter.
This trend should benefit Cisco Systems, Inc. (CSCO), whose 3.7% dividend is nearly two times the 10-year treasury yield. In addition to its dividend, Cisco shares have the additional benefit of being reasonably priced at 13.9 times earnings.
Strip out the $12/share in cash and Cisco trades at just 7.8 times earnings, making it one of the more compelling blue-chip stocks to buy today.
Best Dow Jones Stocks to Buy: International Business Machines Corp. (IBM)
I consider Cisco a top-tier value stock at today’s levels, but International Business Machines Corp. (IBM) isn’t too shabby either. You don’t have to take my word for it; the most wildly successful value investor of all time is a believer: Warren Buffett.
Sure, you shouldn’t just blindly follow every trade the Oracle of Omaha makes, but they’ve turned out pretty well in aggregate over the years. What’s more, investors at today’s levels have the ability to buy IBM stock below the levels Buffett himself did.
More importantly, IBM’s “strategic imperatives” — cloud, analytics, mobile, social and security — are contributing more and more to Big Blue’s business.
Focusing on core areas of growth, it’s also undervalued, and I think the market will start to realize that. Buffett is a famous holder, and Watson has plenty of realistic (and revenue-generating) uses.
Best Dow Jones Stocks to Buy: Home Depot Inc (HD)
Home Depot Inc (HD) is another strong company in the Dow, and a nice seasonal play, too. People should start spending more on touch-ups and remodeling in the spring and summer, when weather is nicer and people are more physically willing and able to make alterations to their home.
Plus, the real estate market itself will heat up as the weather warms. Analysts expect Home Depot to benefit, seeing sales growth of 6.1% in the current quarter, the first of fiscal 2017, which runs through April.
If Home Depot is able to execute, shares should do well after it reports earnings on May 17. Hopefully, the contrast between Home Depot and Lowe’s Companies, Inc. (LOW), which analysts expect will only see revenue growth of 4.4% in the quarter, becomes more clear.
Best Dow Jones Stocks to Buy: Johnson & Johnson (JNJ)
Truthfully, there is no more quintessentially safe stock than Johnson & Johnson (JNJ), which first went public before the Second World War was over, in 1944.
At 2.8%, not only does JNJ sport an attractive dividend yield, but it has been increasing its dividend annually since the years of the Kennedy Administration. And with a payout ratio of just 46%, Johnson & Johnson has plenty of room to increase that dividend for years to come.
With diversified business segments that span the pharmaceutical, consumer and medical devices areas, investors can sleep easy knowing JNJ won’t go down in a ball of flames tomorrow — or likely, ever.
Best Dow Jones Stocks to Buy: Microsoft Corporation (MSFT)
Although Apple Inc. (AAPL) and Alphabet Inc (GOOG, GOOGL) both have higher valuations than Microsoft Corporation (MSFT), Microsoft is considered a “safer” investment than either of its major tech rivals.
By whom, you ask? Oh, just a little credit ratings outfit named S&P. Microsoft is one of just three publicly traded companies with a pristine AAA credit rating — better than the U.S. government. The other two? Johnson & Johnson, Microsoft’s predecessor on this list, and Exxon Mobil Corporation (XOM), which may very well lose that honor in the next 40 days or so after being placed on negative credit watch by S&P.
Microsoft’s business is also changing for the better, as CEO Satya Nadella pivots forcefully and effectively into the cloud, an emerging, high-margin area in tech. The persistence and focus he brings is a welcome change in style from the slow-moving and off-base days of Steve Ballmer.
Best Dow Jones Stocks to Buy: McDonald’s Corporation (MCD)
When CEO Steve Easterbrook was elevated to the top position at McDonald’s Corporation (MCD) about a year ago, the iconic restaurant chain was in major trouble. Same-store sales growth, which had been decelerating for years, actually began to go negative.
The challenges were not trivial: Competition was fierce, infighting with franchisees caused problems and in 2015, for the first time in 45 years, McDonald’s actually closed more U.S. locations than it opened. Not pretty.
Today, MCD stock is up 27% in the last year, and currently sits near all-time highs. Driven by initiatives that Easterbrook brought to the table — most notably All-Day Breakfast, which has been wildly popular — McDonald’s has done a 180. Global same-store sales rose 5% in the fourth quarter, and U.S. same-store sales jumped 5.7%.
The Golden Arches are back on track, and with what looks to be the right leadership finally in place, MCD stock is a quality buy going into Q2.
Best Dow Jones Stocks to Buy: 3M Co (MMM)
Diversified industrial company 3M Co (MMM) is another steady-eddie-type stock that should benefit in a market increasingly hungry for sure things rather than high-risk, high-reward plays. Already up 9% in 2016, MMM outperformed the S&P 500 by nearly 10 percentage points in the first quarter alone.
As a global company, the recent stumble of the U.S. dollar is a net positive — and a major one at that — for 3M. In 2015, 60% of all revenue came from outside the United States.
With over 20% of revenue coming from Europe, the Middle East and Africa, let’s take a look at how the USD/EUR exchange rate affects 3M results.
At the beginning of 2016, the USD/EUR conversion rate was 0.92. Today, it’s around 0.89. It may not sound like a huge change, but that’s about a 3.3% swing. And since 3M reports revenues in dollars, the swing is better illustrated by looking at the EUR/USD ratio, which, due to being inverted, is even more amplified.
At the start of the year, one Euro was worth $1.086; Monday, to the delight of MMM shareholders, it’s worth $1.117.
Last quarter, currency headwinds hit 3M revenue to the tune of $448 million, or 5.8%. That’s nothing to sneeze at, and investors will be elated if 3M continues to be on the good side of currency moves.
Best Dow Jones Stocks to Buy: Caterpillar Inc. (CAT)
While each and every single company in the Dow 30 would benefit from a falling U.S. dollar, some companies like 3M benefit more than their counterparts. And while 3M’s exposure to the strength of the greenback is extreme, Caterpillar Inc. (CAT) has perhaps the most to gain from a weakening dollar.
Caterpillar sees a double benefit from a weaker dollar. Firstly, 59% of revenue comes from overseas, which would make reported revenues higher when converted back into U.S. dollars, as discussed with 3M.
But Caterpillar will also reap rewards as commodity prices — all else being equal — trend upwards, too. Since commodities are priced in dollars, a weaker dollar means prices go up — in turn driving demand for Caterpillar’s mining and drilling equipment.
Best Dow Jones Stocks to Buy: General Electric Company (GE)
General Electric Company (GE), in my opinion, is getting stronger by the day. Last year, it announced a massive asset divestiture in a move that has flooded the company with tens of billions of dollars in cash. Most importantly, GE is shedding its GE Capital assets — the financial segment of its business that nearly brought the company to ruins during the financial crisis.
By ridding itself of GE Capital, General Electric has done two things, both of which I love. Number one: It has refocused on its roots, and is looking a lot more like the industrial behemoth it once was. A narrower focus should make the company more efficient and the results more predictable.
Number two: GE stock has de-risked itself.
Plus, the slimmer GE is flush with cash from selling off parts of itself. In 2016, the company will return $26 billion to shareholders through stock buybacks and dividends, and between 2015 and 2018 CEO Jeff Immelt has vowed to return $100 billion to shareholders.
Best Dow Jones Stocks to Buy: Visa Inc (V)
Finally, Visa Inc (V) might not be a bad stock to pick up for the second quarter. As the world’s leading credit card and payment services company, there’s quite a lot to like. The barriers to entry in this industry are absolutely astronomical, ensuring Visa will be wetting its beak in the payments area for decades to come.
But even though Visa is already ubiquitous across the globe, there’s one major market it has never been able to penetrate: China. Due largely to pressure from the World Trade Organization, Visa is gaining access to the massive Chinese market; previously, China UnionPay enjoyed a government-enabled monopoly.
And, much to the chagrin of American Express Company (AXP), Visa is teaming with Costco Wholesale Corporation (COST) to become the retailer’s only accepted credit card brand. The exclusive deal is an extremely valuable partnership, and one that American Express enjoyed for the past 16 years. Visa will become the exclusive credit card brand of Costco beginning June 20 — towards the end of the second quarter.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.