The year thus far has been an amazing one for the tech-heavy Nasdaq Composite, and for small-caps. The Nasdaq is up 14% since the end of 2017, while the S&P 600 Small Cap Index is up 15%. The S&P 500 isn’t even 10% higher than where it closed at the end of last year, while the Dow Jones stocks are collectively up less than 8%. It’s not a modest disparity.
A closer look at the recent performance of these groups, however, shows a clear sea change in leadership. Small-caps and the Nasdaq are struggling and the Dow Jones Industrial Average is starting to heat up as investors start to seek out safe-haven blue chips again. The Dow is up more than 10% in just the past three months, while the Nasdaq has gained a little more than 6%.
Point being, most of the Dow Jones stocks are gearing up for a strong finish to the year.
With that as the backdrop, here’s a rundown of the top 10 Dow Jones Stocks to bet on as we head into the final quarter of 2018. In no particular order…
Not that it won’t contend with interim cycles along the way, but the next twenty years should be good ones for the aircraft industry, but for Boeing (NYSE:BA) in particular. Between now and 2036, airlines are expected to take delivery of more than 40,000 new passenger jets, versus the 23,500 in use today. Demand for air travel is expected to grow at an annualized pace of 4.7% for that stretch, and Boeing still makes the planes airlines want, and need.
It’s a tailwind that hasn’t done BA stock much good this year, but Boeing shares just tested a major technical ceiling at $372 for the third time since February. If it can break above that resistance, the stock might finally find altitude.
Goldman Sachs Group (GS)
Already in retreat mode as of March of this year, investment bank Goldman Sachs Group (NYSE:GS) has seen its stock fail to rally with the market since April. The then-rumored and now-confirmed retirement of CEO Lloyd Blankfein has proven to be a significant drag, even though CEO-elect David Solomon is a capable replacement.
This may be a situation where the broad market’s worries are not only unjustified, but are creating a buying opportunity. With a forward-looking P/E of just a little more than 9, Warren Buffett’s investment fund Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) not only bought $5 billion worth of preferred Goldman Sachs stock last quarter, but also exercised warrants on another 43.5 million shares of common stock.
If it’s good enough for the Oracle of Omaha to make a big bet…
International Business Machines (IBM)
Just a few months ago aging tech giant International Business Machines (NYSE:IBM) finally turned things around, reversing 22 consecutive quarters of declining year-over-year sales for the final quarter of last year. Though it has continued to improve the top line since then, investors have remained hot and cold … more cold than hot.
That’s starting to change, however. IBM shares have been edging higher since making new 52-week lows in June, as its “strategic imperatives” continue to turn heads and win new business. The company just announced this week that its upcoming launch of new artificial intelligence tools will be its biggest-ever AI unveiling, and takes aim at nine specific industries that are increasingly using artificial intelligence.
It points to the idea that IBM is developing what corporate customers actually want for a change, rather than continuing to build technologies would-be customers don’t actually need.
Travelers Companies (TRV)
Also add insurer Travelers Companies (NYSE:TRV) to any list of Dow Jones stocks that are poised to outperform as the year winds down.
It’s a tough name to get behind, with weather-related damage seemingly getting worse every year. And, it’s an especially tough time of year to wade into a name like Travelers, as hurricane season bears down on a huge swath of the company’s customers. The fact of the matter is, however, though hurricane damage can prove amazingly costly for insurers, that’s nothing new — that expense is built into Travelers’ premiums each and every year… premiums that are rising, by the way.
In the meantime, Paul Newsome, senior analyst with Sandler O’Neill + Partners explained that recent hurricane Florence wouldn’t even “come close” to crimping the insurance industry’s capacity to pay out customer claims. The industry has been able to acquire more than enough capital of late.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance (NASDAQ:WBA) seemingly got a good deal of what it wanted from its drawn-out effort to acquire rival Rite Aid (NYSE:RAD), ultimately adding almost 2,000 units to the mix as part of a bigger growth strategy. Investors haven’t been terribly thrilled about any part of the process though, with WBA shares still down 17% from their early 2017 highs despite a recent bounce from a multiyear low hit in late June.
The pessimism just isn’t justified though. Sales are projected to grow nearly 12% this year, as former Rite Aid stores are integrated, and grow more than 5% next year. Earnings are on pace to improve too, from last year’s profit of $5.10 per share to $5.98 this year to $6.46 next year.
Caterpillar (NYSE:CAT) was widely presumed to be hurt by tariffs both coming and going. Not only would it have to pay more for the important metal it needs to build its earth-digging machinery, its wares would become much more expensive to overseas buyers. It’s a big part of the reason investors have shunned CAT and other heavy machinery stocks this year.
If the tariff backdrop has been or is a problem though, somebody forgot to tell Caterpillar. Its top line continues to grow, and is projected to continue doing so for the foreseeable future. As Baird analyst Mircea Dobre explained last week “The near-term picture is still robust as demand remains solid, (and) pricing is coming through to support [second-half 2019] margins with raw materials plateauing.”
Whatever headwinds are blowing, the tailwinds appear to be stronger for this Dow Jones stock.
Walt Disney (DIS)
Admittedly, Walt Disney (NYSE:DIS) shares have underperformed other Dow Jones stocks since 2015. Between its struggles to keep ESPN relevant, a couple of flops at the box office and, in retrospect, an ill-advised decision to offer some of its content to Netflix (NASDAQ:NFLX) rather than go ahead and start building a streaming platform of its own, its stock’s tepid results aren’t surprising.
Things are starting to change for the better on most fronts though, and with most of Twenty-First Century Fox (NASDAQ:FOXA, NASDAQ:FOX) soon to be an official part of the Disney family, the entertainment giant’s got lots of growth levers to pull.
The kicker: Just within the past few weeks, DIS stock has broken above the upper edge of a converging wedge pattern. This leaves the stock room and reason to keep edging higher.
3M (NYSE:MMM) is boring, plain and simple. There’s only so much pizzazz you can drum up from selling Post-Its, sandpaper and various industrial supplies. Not even the company’s medical technology products are revolutionary.
There’s a lot to be said for boring though. Boring also means reliable; 3M will always be able to sell something to somebody.
It’s not a shtick that traders found compelling earlier in the year, when the stock fell 25% from its January peak to its late-April low … although in retrospect, a big advance in 2017 left the stock vulnerable to profit-taking. Either way, not only are MMM shares one the mend, the company is still growing its top and bottom line.
Revenue is on pace to grow nearly 5% this year and 3% next year, with earnings expected to rise even more. That’s not red-hot progress, but reliability matters sooner or later.
Verizon Communications (VZ)
Verizon Communications (NYSE:VZ) may not be a Dow stock investors want to plow into right away. It’s up 14% from its May low, and was up as much as 18% earlier this month. Once shares find a firmer footing though, the telecom giant could make for a solid holding.
At the very least, Verizon is a great income play, currently sporting a dividend yield of 4.5%. Just as important is the company’s steadily rising payout. Verizon has dished out $2.36 per share over the course of the past four quarters, but that figure was only $1.05 ten years ago.
Perhaps most important of all though, the company can afford to pay that ever-increasing dividend with ever-increasing profits.
Last but not least, fast food chain McDonald’s (NYSE:MCD) has earned a spot on a list of Dow Jones stocks that just might end 2018 on a high note, despite the 70% gain it’s already logged since its February low.
A few quarters ago, McDonald’s began a concerted effort to move away from the restaurant-ownership business and focus more on franchising, which may mean less revenue, but ultimately, more profits. It wasn’t a strategy without its risks, and the company had clear problems that needed to be addressed. By and large though, the transition has proven to be a success. Earnings continue to rise, and are expected to keep growing at a steady 7% clip at least through next year.
The only trick from here is finding the right entry spot for the overbought stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.