The Dow Jones Industrial Average is lagging this year. Where both the Nasdaq Composite and S&P 500 are running ahead by double-digit percentages, the venerable old-line index is just a paltry 3% higher so far.
It points to the impact just a handful of stocks driving the market. It might not be so narrow as when the Magnificent Seven stocks represented virtually all the gains of the indices but we are seeing a high concentration in a relatively small segment of the market, primarily the tech sector.
Part of the reason is the Dow is a price-weighted index so if prices don’t move all that much, the index won’t either. Conversely, capitalization weighting, such as with the S&P 500, tells us the percentage change in the total value of all the stocks in the index. It provides insights into the health of the overall economy which is why the index is often a barometer for how U.S. business is performing.
Although the Dow has added more tech stocks over the years, it is still comprised of a lot of industrial, financial and chemical companies. They tend to not have wide swings in pricing, which gets back to the index’s weighting and why the DJIA is lagging.
Yet that doesn’t mean there aren’t Dow stock to buy now. In fact, several are offering valuations that ought to generate outsized returns for investors. The three stocks below look particularly tempting today.
Chevron (CVX)
Integrated oil and gas giant Chevron (NYSE:CVX) is the first Dow stock to buy in June. It’s off 10% from recent highs and despite a long tail of future growth drivers trades at a discount. Shares go for just 14 times trailing earnings, 10 times next year’s estimates and less than 15 times the free cash flow (FCF) it produces.
And Chevron throws off a lot of cash profits. Last year it produced nearly $20 billion in FCF and though pricing from its upstream business eased in the first quarter the oil stock is still expecting FCF to grow. Having acquired PDC Energy last year, for example, Chevron says it is ahead of its target for incremental cash profits growth of $1 billion .
The energy company’s stock price is down for several reasons though. First, OPEC is considering allowing greater production amongst its member nations, which would lower downstream prices. Second, its acquisition of Hess (NYSE:HES) is being challenged by Exxon Mobil (NYSE:XOM), which maintains it has right of first refusal over the oil company’s Guyana assets.
Both provide opportunity for investors. Chevron doesn’t need Hess to continue expanding and Saudi Arabia won’t allow production to get out of hand. It plans to review the landscape monthly and will shut down excess supply if prices dip too far.
With Brent crude over $85 a barrel and West Texas Intermediate above $81 — both 10% higher from recent lows — Chevron will keep generating excess profits for the foreseeable future.
UnitedHealth Group (UNH)
Health insurer UnitedHealth Group (NYSE:UNH) is the second Dow stock buy now. Depressed due to post-pandemic inflation and labor shortages, the stock is down 9% in 2024. It suffered a net loss in the first quarter but that was due to one-off factors including a cyberattack on its systems and the sale of its Brazilian unit. On an adjusted basis, UnitedHealth earnings of $6.91 per share were up over 10% from the $6.26 per share it earned last year.
The insurers’s business is healthy and strong. It offers significant growth potential in managed care, which McKinsey says offers “one of the most substantial opportunities for payers.” Medicare Advantage revenue rose almost 3% in the first quarter to $7.7 billion from the year-ago period though it was offset by a sharp decline in Medicaid revenue.
At 30 times trail earnings, UnitedHealth Group stock may look expensive but it is not much more than the 28.5 average for the S&P 500. Looking ahead for the coming year shows the insurer is going for a much cheaper 15 times estimates.
As healthcare is a non-negotiable expense for many, UnitedHealth Group stock is a bargain.
Apple (AAPL)
No mater what metric you use to measure Apple (AAPL) stock, it looks expensive. And the stock is up 11% this year and 16% over the last 12 months. It is one of the top 10 performing stocks on the Dow in 2024 and a strong performer for the past year. Shares got a big boost from its recent Worldwide Developers Conference held last week.
Apple unveiled the introduction of artificial intelligence across its consumer products, especially the iPhone. Many analysts believe it could spark a new iPhone upgrade supercycle at a time when slowing growth had Wall Street believing its best days were behind it.
Analysts continue to count Apple stock out of the race. Yet the tech giant always manages to surprise Wall Street with new projects that erase the concerns expressed.
With a “new” lease on life and many consumers eagerly awaiting the next iteration of the iPhone, iPad and Mac operating systems with AI on full display, expect Apple stock to soar and once again dispel any doubts.
On the date of publication, Rich Duprey held a LONG position in CVX and XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
