Among major domestic equity benchmarks, the Dow Jones Industrial Average is lagging this year. The blue-chip index is lower by 7% while the S&P 500 is up more than 1% and the NASDAQ-100 Index is up flirting with a year-to-date gain of 27%. Still, there are some Dow Jones stocks to buy.
Some experts have long argued that due to the way the Dow is calculated – components are weighted by price tag – the index isn’t as relevant as market capitalization-weighted rivals, such as the S&P 500. Plus, the Dow is home to just 30 stocks, hardly an accurate representation of the depth of the broader domestic equity market.
However, the Dow is trying to increase its relevance. Just a few months, S&P Dow Jones Indices announced the removal of three old guard companies from the index – Exxon Mobil (NYSE:XOM), Pfizer (NYSE:PFE) and Raytheon (NYSE:RTN). That trio was replaced by modern, cutting-edge fare, including biotechnology and technology companies.
Having said all that, the Dow may not carry the gravitas it once did, but there are still some stocks in this benchmark investors should consider owning. Here’s a trio to mull over.
Dow Jones Stocks to Buy: Salesforce.com (CRM)
Cloud computing behemoth Salesforce is one of the new additions to the Dow and one of the more compelling names in the index today. One reason for the potential near-term allure with CRM stock is that it’s down more than 18% from its most recent high, providing a rare entry point into a name that’s historically richly valued. Salesforce trades at more than 61x forward earnings even with the aforementioned recent slide.
In the cloud space, nearly all the names, including mega-cap fare like Salesforce, are seen as chronically overvalued, but those multiples are often justified with impressive growth rates. Perhaps the biggest near-term headwind facing CRM and other cloud purveyors is that IT departments are paring spending because of the Covid-19 pandemic, but scenario isn’t expected to dent potentially epic long-term spending on cloud services.
“The enterprise software sector, specifically the cloud-centric firms, are facing what could be a once-in-a-decade demand catalyst as Covid and the economic crisis shift the mind-set of large enterprises and kick off a multiyear technology investment cycle,” said UBS analyst Karl Keirstead in a recent note endorsing Salesforce.
CRM’s second-quarter results, reported in August, knocked the cover off the ball, indicating it’s dealing with the pandemic with aplomb. That could be a sign 2021 could be another banner year for this Dow Jones stock.
“All segments were ahead, with the most notable upside relative to our model coming from platform and service, which were 11% and 8% ahead of our estimates, respectively,” according to Morningstar. “Management noted increasing customer confidence as the quarter progressed and reported that attrition came in better than anticipated.”
As an essential retailer, Walmart is thriving during the pandemic as highlighted by a 16.75% year-to-date gain. Yes, that performance confirms there’s benefit to Walmart stores being open, but there’s much more to the story.
For years, this Dow member was viewed as lumbering, slow-moving and not fast enough to adapt to the competitive threats posed by online rivals such as Amazon (NASDAQ:AMZN). Good news for investors considering WMT stocks: The company is shedding that image and becoming a credible e-commerce force in its own right.
While Walmart’s online retail operation currently loses money, it’s an investment the company is willing to make and it should pay off over the near-term and over the long haul. After all, Adobe Analytics estimates 2020 online holiday shopping sales will reach $189 billion. Looking further out, the pandemic is hastening the brick-and-mortar to online retail shift, one that’s unlikely to be reversed.
Walmart is preparing for an online retail future with initiatives such as Walmart+, a same-day grocery delivery service that costs $98 yearly, turning some stores into e-commerce centers and is using this digital playbook in growing markets outside the U.S., including India and Mexico.
Microsoft, one of the best-performing Dow stocks this year, recently encountered weakness, shedding 6.36% during the last week of October. That retreat is likely a case of some pre-election jitters, but investors shouldn’t get caught up in that conjecture because MSFT stocks isn’t dependent on electoral outcomes.
Simply put, Democratic nominee Joe Biden winning could help Microsoft because his administration will take a softer approach to regulating tech giants. Likewise, it shouldn’t be ignored that this Dow name is performing well while President Donald Trump occupies the Oval Office.
Looking at Microsoft’s most recent quarterly numbers, it’s clear this is a company firing on all cylinders. Azure (cloud computing), Dynamics and Office 365 all delivered deep double-digit top line growth in the most recently completed quarter. On all of those fronts, Microsoft is positioned for success regardless of the pandemic’s trajectory because spending on these business essentials is slated to growth whether employees work from home or return to offices.
Then there’s gaming. Microsoft’s gaming business generated a 22% increase in sales during the most recent quarter and that was before the newest Xbox debuts. Importantly, the company’s gaming business isn’t confined to consoles and software. There’s big opportunity ahead in cloud gaming, a frontier where Microsoft can marry two of its core competencies.
“Cloud gaming has multiple benefits for gamers. It’s much cheaper since there’s no need to buy consoles or gaming PC’s, and if the user’s smartphone or other connected device breaks or freezes temporarily while cloud gaming, the game can be picked up at the same exact spot later,” notes IHS Markit research. “The biggest benefit for cloud gamers, though, is that they can play any game they want, anywhere they go, and on any device they choose.”
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.