I’ve said it before, while the Dow Jones Industrial Average may be a flawed index due to its price-weighting mechanisms, the index still has plenty of value for investors. After all, the index does represent some of America’s largest and finest companies. Thanks to their large moats, strong cash flows and big dividends, Dow Jones stocks really are the bluest of the blue-chips and make great portfolio additions.
However, the various shades of blue do vary.
Thanks to the recent market hiccups, rising global tensions, the trade war and overall economic malaise, not all the Dow Stocks would be considered champions at this point. And in fact, a few of them downright stink. Misreads on trends coupled with the current global economic problems have made several stocks in the blue-chip index chronically underperform in recent weeks and in fact, years for some. That puts them firmly in the “don’t buy camp.”
But how can you tell which Dow Jones stocks are big buys and which are downright sells? Luckily, here at InvestorPlace, we’ve done the leg work for you. Here are three of the Dow’s biggest stocks to avoid.
Dow Jones Stocks to Sell: 3M (MMM)
Percent Off 52-Week High: 26%
The reason to buy industrial giant 3M (NYSE:MMM) stems from the fact the firm is so global in its revenues. A huge portion of its sales come from overseas. That has driven the stock’s cash flows and profits in recent years. The reason to sell 3M is also that it’s so global in its sales.
As the trade war has dragged on, 3M has been hit hard by the overall slowing global economy. A prime example was its last earnings report. Despite a hefty share buyback program, earnings-per-share for this Dow Jones stock slipped over 37% year-over-year, while net revenues declined 2.6%. The vast bulk of the slippage in sales continues to be from Asia, Europe other emerging markets. These are the regions that drove sales in previous quarters. Moreover, the strong dollar and local currency fluctuations continue to hit 3M hard.
This is a big deal going forward. With no end to the trade war in sight and major international economies — such as Germany — slowing way down/contracting, 3M could be between a rock and hard place. During its last conference call, the industrial stock warned things could get rough. Management is now guiding to earn $8.75 per share on the high-end — a dip of 3.1% from its last EPS estimate.
While 3M isn’t in any danger of cutting its dividend and ending its long streak of payout increases, the continued dip in EPS could spell trouble for its pace of dividend jumps. And with a PEG ratio of nearly 2 and forward P/E of 18, MMM stock isn’t exactly a bargain.
With many of the catalysts for ownership now deteriorating and the stock relatively expensive, this is one of the Dow Jones stocks to avoid for the time being.
Percent Off 52-Week High: 12%
There are plenty of old school tech stocks that have pivoted correctly in the new paradigm. Dotcom leaders like Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) have successfully changed their operations to better compete in the cloud and across many new trends in tech. And their investors have been rewarded.
Then there’s IBM (NYSE:IBM).
Big Blue should be a leader. Unfortunately, IBM has managed to make plenty of missteps over the last decade. Missing key trends like the rise of cloud computing has continued to hurt the firm’s bottom line. Revenues last quarter marked the fourth-straight quarterly revenue decline for the tech dinosaur. Based on full-year estimates for 2019, IBM will have seen its sales drop by nearly 19% over the last five years. That’s just terrible.
So, it’s no wonder why IBM decided to buy out Red Hat to inject some growth into the firm for $34 billion. And there is potential for growth. Fellow InvestorPlace contributor David Moadel recently mentioned that the Dow Jones stock could be a major contender in open-source software and in the cloud. However, based on its estimates, IBM says Red Hat won’t boost earnings until 2021 at the earliest. And given how lousy IBM has been at integrating acquisitions in recent history, the potential may not be realized.
What’s worse is that Big Blue recently suspended its lucrative buyback program to pay for the deal. Those buybacks have actually managed to reduce its share count by roughly 25% over the last few years.
In the end, there’s a lot of risk for IBM and not much safety net anymore. Red Hat will take a ton of time to integrate and in the meantime, investors are getting nothing but declining sales while waiting. There’s better tech stocks out there and this is one of the Dow Jones stocks to avoid.
Percent Off 52-Week High: 25%
It’s easy to pick on Caterpillar (NYSE:CAT) based on the trade war and continued lower demand from China. After all, China’s massive expansion and infrastructure upgrades have long been a huge driver for construction equipment. So, with China slowing, CAT is in some hot water.
The issue for the heavy-machinery firm is that it’s not just woes from China that are hurting its bottom line. It turns out, construction spending across the board is starting to wobble in a big way. Both Cummins (NYSE:CMI) and Emerson Electric (NYSE:EMR) both recently warned that CAPEX spending is dropping in the U.S. as well. That CAPEX spending is also coming to the metals and mining industry as well as the sectors. The same could be said for agricultural and forester equipment. Overall demand for powerful diesel engines and other heavy machines is now dropping as the trade war has trickled on.
This is a huge problem for CAT. Sales in the U.S. as well as key segments — like energy — have helped keep the profit engine growing and they have also helped it overcome many of the woes from China/Asia in general. But with many of these markets now seeing contraction and spending dwindle, CAT could be hit hard. And in fact, management is now predicting EPS come in at the lower end of their estimated guidance. If things continue to turn poor and the recession finally hits, the Dow Jones stock could be in a world of hurt.
Now, CAT still pulls in a ton of cash flows and has seen rising sales. This has translated into a big 20% dividend boost and improved buyback program. But now that sales and cash flow growth have been muted in the new tariff-filled environment, that robust pace of dividend/buyback growth could slow if things start to really hit the fan.
And for investors, that could make CAT a stock to place on their watchlist for now.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.