The world’s most widely watched stock market index — the Dow Jones Industrial Average — closed the 2010s with a bang, rising more than 20% in 2019 to mark its third-best annual return of the decade.
Leading the way was Apple (NASDAQ:AAPL), which was the Dow’s best performer by a mile in 2019, rising nearly 90% on the year. Behind Apple, Microsoft (NADSAQ:MSFT) rose more than 50% in 2019, while the likes of Goldman Sachs (NYSE:GS), Proctor & Gamble (NYSE:PG), United Technologies (NYSE:UTX), Visa (NYSE:V) and JPMorgan (NYSE:JPM) all rose more than 30%.
Heading into 2020, the big question is whether the red-hot Dow Jones stocks of 2019 can stay hot into 2020.
For most of them, I think the answer is “yes.” Indeed, of the top-five performing Dow stocks of 2019 (AAPL, MSFT, JPM, V and UTX), I think four of them will be among the top-five performing Dow stocks of 2020.
Without further ado, then, let’s take a look at the five Dow Jones stocks that I think will post the biggest returns over the next twelve months.
Top Dow Jones Stocks to Buy for 2020: Apple (AAPL)
In 2019, Apple stock posted its best annual return since 2009. Now, shares are ready to follow-up that record performance, with another record-setting performance in 2020.
The bull thesis here is quite simple. For the first time ever in 2020, both Apple’s hardware and software businesses will fire on all cylinders. The hardware business will get a big boost from the low-priced iPhone SE2 at the beginning of the year, and a fully loaded 5G iPhone at the end of the year. Meanwhile, the software business will sustain robust strength through Apple TV+ and Arcade+ expansion in a year when video and game streaming adoption rates should balloon thanks to 5G and cloud gaming innovations.
Some will argue that a lot of this upside is already priced into AAPL stock. It’s not. Shares trade at 22-times forward earnings. That’s simply an average multiple for an information technology stock. It’s also well below the average multiple for software stocks (about 25), and Apple is increasingly turning into a software company.
Consequently, favorable fundamentals and a reasonable valuation will support further gains in AAPL stock in 2020.
Following up on a 50%-plus gain in 2019, shares of global technology giant Microsoft look primed to rattle off more big gains in 2020.
Central to the MSFT bull thesis are two ideas. First, as go the enterprise cloud businesses (mostly, Azure), so goes MSFT stock. This idea is simple to wrap your head around. Over the past few years, Microsoft has made a huge pivot into enterprise cloud services, centered around its cloud infrastructure offering, Azure. Out-sized growth from these services has materially improved Microsoft’s growth trajectory, and in response, MSFT stock as flown higher. Presumably, so long as Microsoft’s enterprise cloud businesses remain on fire, MSFT stock should keep moving higher.
Second, Microsoft’s enterprise cloud businesses will gain significant momentum in 2020. This is mostly because, after winning the Pentagon’s highly coveted cloud contract in late 2019, Microsoft has affirmed itself over Amazon (NASDAQ:AMZN) as the new leader in the public cloud market. With this new momentum, Microsoft should be able to win more cloud contracts at more favorable price points. At the same time, enterprise spending trends across the IT sector should improve in 2020, as global trade tensions ease and companies more aggressively invest in their cloud migrations.
To be sure, MSFT stock is richly valued, relative to its historical self. But, sustained low rates and cloud momentum provide support for this extended valuation. So long as rates remain low and Microsoft maintains strong cloud momentum, MSFT stock will keep out-performing.
Calendar 2020 could be the year of bank stocks, because the conditions are picture perfect for bank stocks to roar higher over the next few quarters.
Consumer banking activity will remain robust, supported by strong labor conditions (low unemployment, healthy job growth and steady wage gains). Corporate banking activity will rebound, thanks to easing trade tensions and huge technological developments like 5G and cloud gaming (both of which will require huge investments across the tech sector). The amount of money banks can squeeze out of consumer and corporate banking activity will also go up thanks to rising rates and a steepening yield curve.
In other words, you really could not dream up a more perfect situation for bank stocks.
In this banking sector, JPMorgan is the cream of the crop. They have the best management team, headed by Jamie Dimon, the most seasoned big bank exec in the U.S. They always beat the numbers, while other banks struggle to hit their numbers. JPMorgan is also always on the cutting edge of tech integrations, headlined by a big partnership with Amazon.
Zooming out, then, JPMorgan is the best company in a what should be a red-hot industry in 2020. That’s a recipe for the success of JPM stock.
As goes the global economy, so goes Visa stock. It is this simple logic that provides support for why Visa could be one of the Dow’s top stocks in 2020.
After slowing for most of 2018 and 2019 thanks to escalating U.S.-China trade tensions and choppy monetary policy, the global economy is ready to rebound in 2020 thanks to easing global trade tensions and supportive global monetary policy. As the economy rebounds, corporations and consumers alike will up their spending. A lot of that spending will happen through transactions cards, a vertical of the commerce market that Visa dominates.
Consequently, the train of logic here is simple. The global economy rebounds in 2020. Consumers and corporations start spending with their credit and debit cards more. Visa card usage goes up. So do payment volume, revenue and profit. Sustained healthy growth across all-important operating metrics will power Visa stock higher.
Could it really be that simple? Yes. Valuation friction is something to be aware of — but, as is the case with Apple and Microsoft, low rates and strong business momentum provide support for Visa’s extended valuation.
As such, so long as rates remain low and Visa’s growth trends remain healthy, Visa stock will power higher in 2020.
The one Dow Jones stock on this list that wasn’t a top performer in 2019 is industrials giant 3M (NYSE:MMM), and 3M makes this list mostly because relative under-performance from MMM stock in 2019 sets shares up for relative out-performance in 2020.
The portfolio of products and services that 3M sells together comprise the operational backbone of the world’s industrial economy. That economy took a big hit in 2019 amid escalating U.S.-China trade tensions and paused investment into the space. As it did, 3M’s sales and profit trends took a hit, too. So did MMM stock.
This will all reverse course in 2020.
The global industrial economy will rebound on the back of easing trade tensions. Investments into the space will pick back up as companies feel more certain and confident about the economic outlook. Sale and profit trends at 3M will meaningfully improve, and MMM stock — which trades a relatively cheap 18-times forward earnings — will soar higher thanks to renewed profit growth and multiple expansion.
As of this writing, Luke Lango was long MSFT.