There were 12 companies in the original Dow Jones Industrial Average when it got its start in 1896. General Electric (NYSE:GE) was one of them. Today’s it no longer is.
At 4 p.m. on June 25, GE was removed from the Dow, replaced by Walgreens Boots Alliance (NASDAQ:WBA). It wasn’t the first time GE’s been removed from the index. The first time happened in 1899 and again in 1901; the second time it took six years to get back into the index where it then stayed for 110 years.
I don’t know if GE will ever make it back this time, but what I do know is that there are a lot of great companies I’d like to see included in the Dow.
With share prices above $1,000, their inclusion would swamp the index which is weighted by price, not market cap. That means Amazon and Alphabet would account for a significant amount of the index’s movement, reducing the other 28 companies to minimal roles.
However, that still leaves a lot of options. Here are my seven stocks to buy that aren’t in the Dow but should be.
Stocks to Buy: Activision Blizzard (ATVI)
Activision Blizzard (NASDAQ:ATVI) is already a big company with a $59 billion market cap — the smallest market cap currently on the Dow is Travelers Companies (NYSE:TRV) at $33 billion — but if video games go 100% digital, investors can expect it to get a whole lot bigger.
“It is a certainty that videogames will be approximately 100% digital in the coming years,” Piper Jaffray analysts wrote on June 25. “While exact timing is hard to pinpoint, we think 2022 is a realistic expectation.”
Should this come about as predicted, ATVI’s margins would get fatter than they already are — some suggesting they’ll grow by as much as ten percentage points for both gross profits and operating profits.
If that’s the case, ATVI’s operating margin will return to the high 20’s, a level not seen since 2015.
“Applying modest (5% or less) top line growth and the positive margin impact, 2022 publisher earnings per share would be more than double what each just reported for 2017,” Piper Jaffray added.
With Activision Blizzard’s free cash flow at record levels, it’s hard to imagine ATVI stock not going higher under this scenario.
Stocks to Buy: Starbucks (SBUX)
Starbucks (NASDAQ:SBUX) stock has now slipped into the $40’s and is trading at a 52-week low and a total annualized return of -1.2% over the past 36 months. Given the terrible markets of late, I’m pretty sure the losses will continue as the summer progresses.
CEO Kevin Johnson finds his company in a relatively unfamiliar spot. Sales are sputtering, profits are down, and its biggest growth market (China) seems ready to reverse course — and not in a good way.
As I stated recently, the world’s biggest coffee shop needs to deliver on a few of its promises if SBUX stock is to resume heading higher.
The easier part of this undertaking is to close more stores in crowded urban U.S. markets. To that end, it will close three times as many stores next year as it will in 2018.
The hard part is deciding how much growth China can accommodate in this uncertain trade environment. The company’s currently planning to open 3,000 stores in China over the next five years.
If that doesn’t go well, shareholders can expect a stock price in the $30’s or even the $20’s over the next 12-24 months; it’s a frightening thought for a company that has been on a roll for most of the past decade.
Fear not. As in the past, the Starbucks brain trust will figure out how to re-energize the business. That said, owning its stock in the near-term is going to take courage.
Stocks to Buy: Emerson Electric (EMR)
If you own Emerson Electric (NYSE:EMR) stock it’s okay if you feel like you need to be sick; EMR has been riding a rollercoaster ride the past 52 weeks with at least three significant 5%-10% corrections.
If you have steel or aluminum in your products as Emerson Electric does, you’re bound to be concerned about the looming trade war between the U.S. and just about every other country in the world.
There’s no way around the fact that Emerson Electric’s prices it charges customers are going up. How easily its customers’ end users can absorb those price increases will dictate what happens to EMR stock over the next 6-12 months.
Right now it’s poised to grow sales, earnings per share and free cash flow by 50%, 67%, and 40% respectively over the next four years with its automation solutions leading the way.
I don’t think you’re going to be able to quit your day job from EMR profits, but it’s got a reasonable 2.8% yield.
Stocks to Buy: Zoetis (ZTS)
I’m an animal lover, so companies such as Zoetis (NYSE:ZTS) are always in my consciousness. For those unfamiliar with Zoetis, it is the world’s largest animal health company, providing medicines and vaccines for both companion and farm animals as well as products vets require to deliver quality care for their non-human patients.
In May, Zoetis announced that it was buying global veterinary diagnostics firm Abaxis Inc. (NASDAQ:ABAX) for $1.9 billion. The acquisition will make the company’s diagnostics business more competitive as a result while also generating a more meaningful slice of Zoetis’ $5 billion in annual revenue.
In March 2017, I named Zoetis one of the seven best low-risk healthcare stocks to buy. One of my reasons for owning its stock was the growth of its dividend. Now paying 50 cents on an annualized basis, it’s grown its dividend over the past four years by 25.7% annually, which is outstanding.
Equally important, its free cash flow (dividends are paid from this) has grown 33.8% annually over those same four years.
Stocks to Buy: Progressive (PGR)
Anyone who follows my work writing about investments knows I have a soft spot for female CEOs. Empirically, it’s been shown that women-led companies outperform the S&P 500, and yet so few women are running America’s largest companies.
The solution is simple. Big companies need more diversity on their board of directors — both by gender and race — if there’s any hope of it trickling down to the C-suite and upper management.
One woman who’s leading the charge is Progressive (NYSE:PGR) CEO Tricia Griffith who was promoted to the insurance company’s top job on July 1, 2016, after former CEO Glenn Renwick moved into the Executive Chairman role.
“We’re disrupting the homeowners’ insurance market by launching a brand new way to make sure you’re getting the right coverage at the right price by getting multiple quotes quickly and easily — in just 15 minutes for most people,” Griffith recently told Chief Executive magazine. “Since we upended the auto insurance market with a similar approach two decades ago, we’ve all gotten used to shopping for hotels, airfare, and just about everything else in this way.”
In October 2016, I named Griffith one of the three best female CEOs whose stock investors should buy; it’s up 85% since then.
Great CEO. Great company. Great stock.
Stocks to Buy: VF Corp (VFC)
VF Corp (NYSE:VFC) is arguably one of America’s most under-appreciated and little-known large-cap companies.
Based in North Carolina, you probably are more familiar with three of its biggest brands: Vans, The North Face, and Timberland. VF got its start in 1899; if longevity were a major criterion for inclusion in the Dow; VFC would be at the front of the line.
VF is a company that’s been built on acquisitions.
Its last significant buy was in 2011 when it paid $2 billion to acquire Timberland, a company with $3.2 billion in revenue at the time. More recently VF shelled out $820 million to buy the parent of workwear brand Dickies.
Over a year into his tenure, CEO Steve Rendle is champing at the bit to make another Timberland-like purchase.
“We absolutely would,” Rendle recently told Fortune discussing the possibility of a mega-acquisition. “It’s how we transform. It’s how VF has transformed.”
In February 2017, VF Corp. made my list of seven sports stocks to buy that would make you money over the long haul. It’s up 62% in just 16 months. It could easily see $100 by the end of 2018.
VF = acquisitions = growth = higher stock price.
Stocks to Buy: Phillips 66 (PSX)
Are you familiar with Aaron Levitt’s writing?
He’s been an InvestorPlace contributor for some years; he’s especially knowledgeable when it comes to the oil patch. Downstream, upstream, midstream; it doesn’t matter. If there’s oil involved, he’s got an opinion.
On June 15, Levitt recommended that investors follow Warren Buffett into Phillips 66 (NYSE:PSX) calling it a cash and dividend machine. At one point the Oracle of Omaha owned 14.9% of the company before selling 35 million shares to Phillips 66 to remove Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) from the 10% regulatory oversight.
At the end of December, Buffett was sitting on a $1.7 billion unrealized gain from Phillips 66, making it Berkshire Hathaway’s sixth-largest equity holding. Since the February buyback by Phillips 66, it’s likely dropped down the rankings.
That said, except for Berkshire Hathaway Energy’s 16,400 miles of natural gas pipelines, Phillips 66, as far as I know, is the company’s only other oil and gas investment.
That’s saying something.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.