It may not be a fun realization, but corrections, crashes, and bear markets are a normal part of the investing cycle. Last year served as this unpleasant reminder, with all three major U.S. stock indexes falling into a bear market.
But among the major stock indexes, the Dow Jones Industrial Average (^DJI) stood head and shoulders above the pack. Its 9% loss was considerably “better” than the 19% and 33% respective declines delivered by the S&P 500 and Nasdaq Composite in 2022.
Since the Dow Jones is a 30-component index packed with mature, profitable businesses, it’s well equipped to deal with stock market downturns. It’s also a great place to look for investing ideas during a bear market.
As we motor ahead into February, the following three Dow stocks stand out as screaming buys.
Visa
The first Dow Jones Industrial Average stock begging to be bought in February is payment-processing kingpin Visa (V).
The biggest knock against Visa is that it’s cyclical. Since recessions are an inevitable part of the economic cycle, Visa is bound to encounter a spending slowdown from consumers and businesses. But even if a recession were to materialize this year, investors should understand that economic downturns tend to be short lived.
What makes Visa such a great company is its ability to grow in lockstep with the U.S. and global economy over time. In short, patience tends to pay off handsomely for Visa’s shareholders.
Something else that doesn’t hurt is holding a majority of credit card network purchase volume in the No. 1 market for consumption in the world. As of 2021, Visa accounted for 52.6% of network purchase volume in the U.S. and was the only one of the four major payment networks to significantly increase its share following the Great Recession.
But don’t think for a moment the U.S. is Visa’s only organic growth opportunity. There’s a multidecade runway for Visa to organically expand into underbanked emerging markets with its payment infrastructure. Last year alone, Visa’s cross-border payment volume, excluding transactions within Europe, soared 49%. This serves as confirmation that emerging markets can help Visa sustain a double-digit growth rate for a long time to come.
Another key investment thesis with Visa that I’ve driven home repeatedly is the fiscal prudence of management. Although Visa could easily enter the lending arena, the company has chosen to strictly remain a payment processor. The advantage of avoiding this temptation is that it has no loan-loss liability during economic downturns. Not having to set aside billions of dollars in provisions to cover loan losses is a powerful advantage that helps Visa bounce back from recessions faster than most financial stocks.
With Visa valued at 24 times Wall Street’s consensus earnings for 2024, and the company capable of sustained double-digit sales growth, it looks like an incredible company at a very fair price.
Verizon Communications
A second Dow stock that’s nothing short of a screaming buy in February is telecom giant Verizon Communications (VZ). As of last weekend, Verizon was the highest-yielding Dow component (6.4% yield).
For more than a decade, telecom stocks have been nothing more than an afterthought. Historically low lending rates made growth stocks far more attractive. But with interest rates climbing at their fastest pace in four decades and investors navigating their first extended bear market since 2009, value plays like Verizon are coming back into focus.
One factor clearly working in Verizon’s favor is the evolution of wireless service as a basic necessity. No matter how poorly the U.S. economy or stock market performs, wireless retail churn rates don’t meaningfully rise. This leads to highly predictable cash flow for Verizon, which allows the company to confidently outlay capital for infrastructure projects and its dividend without any fear of adversely impacting its profitability.
The 5G revolution is, arguably, the top catalyst for Verizon through at the least the midpoint of this decade. After approximately 10 years without any major wireless download speed improvements, 5G offers consumers and businesses a tangible lure to trade in their devices. Even though upgrading its wireless infrastructure will be costly and time consuming, the benefit for Verizon of users increasing their data consumption far outweighs the cost. The company’s wireless service revenue rose nearly 6% last year, with retail postpaid net additions hitting a seven-year high.
But the unsung hero for Verizon might just be the resurgence it’s seen in broadband additions. After spending a small fortune to purchase mid-band spectrum for its 5G home and enterprise broadband services, Verizon registered 416,000 net broadband adds in the fourth quarter. That was its best quarter for broadband net additions in over a decade. The bundling potential broadband offers should boost Verizon’s operating cash flow and improve its operating margins.
Currently valued at a little over 8 times Wall Street’s forecast earnings for 2023, Verizon and its 6%-plus yield offer an excellent risk-versus-reward for investors.
Johnson & Johnson
The third Dow Jones stock that makes for a screaming buy in February is none other than healthcare conglomerate Johnson & Johnson (JNJ). J&J, as Johnson & Johnson is more commonly known, parses out a hearty 2.7% yield and has raised its annual payout for an impressive 60 straight years.
Generally speaking, healthcare stocks make for smart buys during a bear market due to their defensive nature. Since we can’t decide when we get sick or what ailment(s) we develop, there tends to be steady demand for prescription drugs, medical devices, and healthcare products and services, in any economic environment. It’s this demand predictability that’s kept Johnson & Johnson’s profit needle pointing higher for decades.
In terms of operating segments, pharmaceuticals are J&J’s not-so-subtle secret to success. For more than a decade, Johnson & Johnson has shifted its focus to high-margin, fast-growing, brand-name therapeutics.
If there’s a potential downside to having more than half of its sales come from pharmaceuticals, it’s that sales exclusivity for brand-name drugs is finite. But J&J has all the right answers to this possible headwind. It’s devoting plenty of capital for internal research, has outlaid cash for numerous drug-development collaborations, and is even willing to make acquisitions. It also has an industry-leading medical technologies segment that’s well positioned to take advantage of an aging global population.
One of Johnson & Johnson’s bigger catalysts in 2023 is the upcoming spinoff of its health products segment, which will be known as Kenvue. Once this spinoff is complete, J&J will sport a faster organic growth rate driven by pharmaceuticals and its MedTech segment, and will likely be deserving of an earnings multiple of more than 16 (based on Wall Street’s 2023 consensus), which is where it ended this past week.
Lastly, Johnson & Johnson is a company that even the most conservative investors can buy and hold with confidence. Out of the thousands of publicly traded companies, it’s one of only two with the highest possible credit rating (AAA) from Standard & Poor’s, a division of S&P Global. It’s also had just 10 CEOs in its 137-year history. Therefore, there may not be a safer and steadier Dow component than Johnson & Johnson.
— Sean Williams
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