Chemicals maker Dow (NYSE:DOW) is the smallest member of the Dow Jones Industrial Average (DJIA) by market value. The blue-chip index weights its members by price, not the traditional market cap weighting scheme, but even by price weighting, Dow stock is the second-smallest member of the Dow Jones Industrial Average.
That’s the good news because Dow stock has recently been repudiated in significant fashion with the U.S.-China trade spat serving as major drag on the shares. While Michigan-based Dow operates in a stodgy industry (chemicals) and probably should be seen as a value name rather than a growth stock, it’s a cyclical stock, meaning it’s likely not an appropriate holding for conservative investors in the current market environment.
Recent price action confirms as much. Year-to-date, Dow stock is one of just seven members of the DJIA that are in the red and one of just four with 2019 losses of 10% or more. Simply put, in price, there is truth, and the truth for Dow stock right now is largely unappealing, particularly with the shares in the midst of a month-to-date slide of 15.17% (as of Aug. 20).
Dow is one of three companies spun off from the merged Dow/DuPont company. The others are DuPont de Nemours (NYSE:DD), and Corteva (NYSE:CTVA). Only Corteva is trading higher since the spin-offs.
The primary drivers of Dow stock performance from an operating unit standpoint are the company’s Performance Materials and Coatings, Industrial Intermediates and Infrastructure and Packaging and Specialty Plastics businesses.
They Can’t All Be Wrong
Last month, Dow CEO Jim Fitterling said trade tensions are weighing on consumer confidence, impacting purchases of larger ticket items that Dow makes ingredients for. As a result, the company lowered its 2019 capital expenditures plan to $2 billion from $2.5 billion.
“What tariffs have done in some businesses is cause a little bit of a pause, a little bit of reluctance…Chinese purchasers to maybe buy American goods,” said Fitterling in a Bloomberg TV interview. “That shifts some of the demand around.”
Fitterling is optimistic a trade deal will get done, he just doesn’t see that deal coming to fruition before the end of this year. Without the U.S. and China making nice on trade, it’s hard to get involved with a stock like Dow.
Additionally, analyst sentiment is sour on Dow stock. While analysts are not right or wrong 100% of the time, there’s often similar actions from the sell side in a condensed period of time. Since late July, there have been five downgrades of Dow stock by four different analysts, moves that also included several lower price target revisions.
Last week, Bank of America Merrill Lynch analyst Steve Byrne pared his rating on Dow stock to “underperform” from “neutral,” his second downgrade of the name in less than a month, while trimming his price target to $41 from $55. Byrn cited “eroding fundamentals” in his downgrade of Dow stock.
Thing is, the average price target on Dow stock is just over $56 while the shares closed around $43 on Tuesday, Aug. 20. Make of that what you will, but that could be a sign more bearish price target revisions are coming because analysts like to save face.
Bottom Line on DOW Stock
For patient, risk-tolerant investors, there are some silver linings with Dow stock. At just 12x forward earnings, the shares are by no means expensive and there is compensation for the risk in the form of a dividend yield north of 6%. That’s more than triple what you get on the S&P 500.
And there’s one more silver lining: some insiders recently bought Dow stock, something they wouldn’t be doing if they believed a recession is imminent. After all, insiders only buy their company’s shares for one reason: because they think the stock is going up.
Todd Shriber doesn’t the aforementioned securities.
