In 2022, Dow Jones 30 basement dwellers are a group of companies that usually live in the attic.
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On the contrary, among the top performers of the widely watched benchmark are names that struggled to find their place earlier in the decade. Chevron’s connection to higher oil prices and low-priced defensive medical stocks from Merck and Amgen is causing these stocks to lead the Dow into the second half of the year.
On the back of the pack are three of the four consumer cyclical index currencies (with the less economically sensitive McDonald’s in fourth place). It’s no coincidence that these Dows are lagging at a time when inflation has pushed consumer sentiment to record lows at the University of Michigan.
And as the market gears up for a recession amid the Fed’s aggressive rate-hiking campaign, things only seem to get worse for the consumer sector. Maybe not.
With falling stock prices and improving road prospects in 2023 and beyond, an unusual three lagging Dow reversal is in the offing.
Will the Walt Disney Stock be reflected?
That Walt Disney Company (NYSE:DIS) is Dow’s Caboose with a negative yield of 38% year over year. Its stock price has halved from last year’s record high on a mix of concerns that are valid but don’t reflect the size of the sale.
Increased investment in original content, while driving higher media production and programming costs, will ultimately improve Disney’s competitive position in the highly competitive streaming space. With a wave of new entrants and Netflix showing signs of vulnerability, it’s time for digital entertainment companies to invest time. Disney’s urgent focus on its direct-to-consumer channel will ultimately be justified, leading to continued growth in subscriber numbers and market share.
In the amusement park sector, many concerns have been raised about renewed closures in China, where restrictions are now being eased. Portions of the Shanghai operations have reopened and barring further outages, the key asset will soon be back up and running. Meanwhile, traffic trends are rising at Disney’s North American parks.
Still, it’s Disney+ that represents the biggest growth opportunity for the company — and it’s underestimated, despite the number of stellar additions (compared to Netflix’s subscriber losses). As disputes with the Florida government and other pressures ease in the near term, investors will realize that Disney’s 17x P/E in 2023 is “finally a small honor.”
Is Nike Stock a Long Term Purchase?
NIKE, Inc. 04.30 NYSE: NKE is down 34% this year and is the second worst on the Dow index. For the seventh straight month, it’s nearing a decline not seen since 2016. Note that shares have tripled about five years after the 2016 drop.
It’s not far-fetched to think that history can repeat itself and Nike will be around for $300 by 2027. For the global sneaker king, however, it will have to be done step by step. Due to supply chain disruptions and weakening in the important Greater China market, the management must first be revised. It also needs to prove that the increased spending on its digital capabilities and DTC business is fruitful.
As Nike continues to connect more directly with its passionate customer base, financial results should follow. There are no demand problems and the company’s ability to raise prices in an inflationary environment should allow it to weather the economic downturn.
So while the market is focused on uncharacteristically low earnings growth in the current fiscal year, a look ahead suggests Nike’s return is imminent. Wall Street is forecasting EPS growth of 21% in fiscal 2023. That could very well pave the way for another multi-year bullfight.
Will Home Depot Stock Recover In The Second Half?
After posting big gains in each of the last three years, The Home Depot, Inc. (NYSE:HD) fell by 32% in 2022. The pullback was necessary as much of the rise came from the unusual demand environment caused by the home renovation pandemic. Stocks of home accessories retailers also held back rising transportation costs and wages, along with fears that higher interest rates would cool the hot real estate market.
Yes, domestic repairs and remodels are likely to slow during the contraction phase. The same applies to construction activity and thus to the demand for timber, tools, paint and equipment. The recession is not ideal for any retailer with more than 2,000 Stone stores.
Short-term slowdown aside, there are underlying long-term trends that support long-term growth. According to the Federal Home Loan Mortgage Corporation, about half of family homes in the United States were built before 1980. This means that despite the hyper-renovation activities of recent years, we still have a lot of work to do to modernize. At the same time, the Home Depot department has estimated for over a decade that a shortage of household materials could take five years of home construction to repair.
Combine these two forces with the millions of Millennials and Gen Zers eager to buy a home, and the long-term outlook for the homeowning industry remains solid. With a final P/E ratio of 18 times, 20% below the five-year average, buying Home Depot stock would be a constructive move here.