In the next month or two, many potential negative catalysts could push stocks down significantly. Those catalysts could easily push stocks down much further between now and November. In the wake of the downturns created by these events, a number of Dow Jones stocks are likely to reach very attractive entry points. This will create excellent opportunities for investors looking for solid, cheap, blue-chip names.
Two negative drivers – worries about the high valuation of tech companies and concerns about the labor market – have already weighed on stocks recently. But other negative catalysts could also easily arise. Internal political turmoil, including increased partisan conflict and/or a dispute in the wake of the U.S. election, could take a toll on stocks. In the geopolitical arena, the conflict between the U.S. and China could worsen.
And of course, when it comes to the novel coronavirus, the leading vaccine candidates can suffer significant setbacks. Or, as I’ve warned previously, colder weather could cause the pandemic to re-intensify.
But I remain optimistic that, driven by a successful vaccine and pent-up demand, the economy will bounce back strongly by the beginning of next year. Consequently, I think significant declines in stocks will create many good buying opportunities.
Three of the best Dow Jones stocks to buy in the wake of declines are IBM (NYSE:IBM), McDonald’s (NYSE:MCD), and Chevron (NYSE:CVX).
Dow Jones Stocks: IBM (IBM)
Trading at just 10 times analysts’ average 2020 earnings estimate, Big Blue is already extremely cheap for a tech company. A further, meaningful decline of IBM (NYSE:IBM) stock would make the name a steal.
Many investors know about the potential of the company’s cloud business. But fewer know that one of its old businesses appears to be in the midst of a turnaround.
Despite the pandemic, revenue of IBM’s hybrid cloud unit soared 34% year-over-year last quarter, up from 23% in Q1. And in the older but fairly lucrative server market, IBM’s sales jumped 17.6% YOY in Q2. Its gains appear to have been driven by its new processor, unveiled in 2019, which “is designed to support 3X the number of users and workloads” as its predecessor, according to a Seeking Alpha columnist.
As I noted in a previous column, the company’s new CEO, Arvind Krishna, and its new president, Jim Whitehurst, “should … meaningfully accelerate [IBM’s] financial results over the longer term, boosting IBM stock in the process.”
Also upbeat on Krishna and Whitehurst is research firm Edward Jones which expects their leadership to improve the company’s cloud business. The firm adds that IBM “has been transforming itself by focusing investments in higher-growth software segments.”
As a bonus, if IBM stock drops, its dividend yield, currently 5%, will climb further. Therefore, it makes the list of Dow Jones stocks to buy on a dip.
McDonald’s (MCD)
MCD stock is riding high after its meal named after rapper Travis Scott appears to be a big hit. On Sept. 16, the company reported that some of its restaurants ran out of supplies needed to make the offering.
The news helped propel MCD stock to a new 52-week high on Sept. 16.
Research firm Longbow responded to the news by raising its price target on the shares to $249 from $227 on Sept. 17. Estimating that the Travis Scott meal increased same-store sales by four or five percentage points, the firm says meals named after stars will boost sales further. Longbow thinks that McDonald’s Q3 SSS will beat the average estimate, and it kept a “buy” rating on the name.
Further, given the popularity of spicy chicken these days, I believe that the company’s new Spicy Chicken McNuggets should also boost its sales going forward. The highly successful launch of the Travis Scott meal and the addition of the Spicy Chicken McNuggets show that the company is able and willing to take steps to meaningfully increase its top and bottom lines.
As I noted in a previous column, the company is well-positioned to succeed during the work-from-home era and should not be hindered by global economic challenges.
Chevron (CVX)
After a vaccine for Covid-19 is widely distributed in developed nations, I expect pent-up demand for travel to explode. This will greatly boosting oil prices in the process. Already, during a lull in the pandemic in the U.S., demand for airplane tickets has apparently reached its highest level in at least six months.
Given its recent spurt of acquisitions, which were made at good prices, Chevron will be very well-positioned to benefit from the oil-price surge when it comes.
Just as I’ve stated many times (apparently correctly) that investors and pundits were wrong to think that natural-gas demand would quickly fade, I think the Street has become way too bearish on oil.
In most parts of the world, the lion’s share of vehicles will continue to use oil for decades. Demand for oil is surging in many developing nations. And, most employees will return to the office after the pandemic. One reason is concern about the productivity of people working from home. And, it is easier logistically to manage an in-office workforce.
Meanwhile, the exodus to the suburbs and lingering concerns about the spreading of germs on mass transit could result in many more people using and buying cars going forward.
Unlike many of its peers, Chevron’s debt levels are reasonable, but CVX stock carries an enticing 6.5% dividend yield.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
