In 2022, the Dow Jones-30 basement dwellers are a group of companies that usually hang out in the attic.
Conversely, the leaders of the widely followed benchmark include names that struggled to find their footing at the start of the decade. Chevron’s link to rising oil prices and cheap valuations of defensive healthcare stocks Merck and Amgen make these stocks the Dow Jones’ front horses heading into the second half.
At the bottom of the pack are three of the four consumer cyclical names in the index (the fourth, McDonald’s, less sensitive to the economy). It’s no coincidence that they’re the Dow Jones laggards at a time when inflation has driven consumer sentiment out of the University of Michigan to an all-time high.
And with the market increasingly prepared for a recession amid an aggressive Fed rate hike campaign, things can only seem to get worse for the consumer discretionary sector. Maybe not.
With stock prices depressed and the street seeing better prospects in 2023 and beyond, a turnaround is coming for these three unusual Dow laggards.
Will Walt Disney stock rebound?
The Walt Disney Company (NYSE: DIS) is the caboose of the Dow with a negative 38% year-to-date return. Its share price has halved from last year’s record high due to a mix of concerns that, while valid, are out of proportion to the scale of the sell-off.
While growing investments in original content will drive up media production and programming costs, they will ultimately improve Disney’s competitive position in the ultra-competitive streaming space. With a wave of new market entrants and Netflix showing signs of vulnerability, now is the time for digital entertainment companies to spend. Disney’s urgent focus on its direct-to-consumer channel will ultimately be well-founded and lead to continued gains in subscribers and market share.
In the theme park sector, much of the worry is about further closures in China, where restrictions are now being eased. Parts of the Shanghai operation have reopened, and barring another setback, the key asset will soon be back in full swing. Meanwhile, traffic trends at Disney’s North American parks are on the rise.
Still, it’s Disney+ that’s the company’s biggest growth opportunity, and one that’s been underappreciated despite a string of stellar subscriber additions (compared to subscriber losses at Netflix). As the spat with the Florida government and other near-term pressures fade, investors will realize that Disney’s 2023 P/E of 17x is “a small valuation after all.”
Is Nike Stock a long-term buy?
NIKE, Inc. (NYSE: NKE) is down 34% this year and the second worst performer in the Dow Jones. It is on the verge of closing lower for the seventh consecutive month, which had not happened since 2016. Note that approximately five years after the crisis of 2016, the stock has tripled.
It’s not unreasonable to think that history can repeat itself and Nike will be a $300 stock by 2027. But it will have to be one step at a time for the global sneaker king. Management must first overcome supply chain disruptions and weakness in the all-important Greater China market. It also needs to prove that increased spending on its digital capabilities and DTC activities is successful.
As Nike continues to connect more directly with its passionate customer base, financial results should follow. There are no demand issues to be seen here and the company’s ability to raise prices in an inflationary environment should see it through an economic downturn.
So while the market is focused on unusually weak earnings growth in the current fiscal year, a glimpse of what lies ahead suggests that a Nike comeback is on the way. Wall Street forecasts EPS growth of 21% in fiscal 2023. That could very well set the stage for another multi-year bull run.
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) is down 32% in 2022. The pullback was inevitable given that much of the climb was due to the unusual demand environment triggered by pandemic home renovations. Shares of the home improvement retailer were also dragged by rising transportation costs and wages, in addition to fears that higher interest rates would cool a boiling housing market.
Yes, home repair and renovation activity is expected to slow during a period of contraction. The same is true for home building activity and hence the demand for lumber, tools, paint and appliances. A recession is not ideal for a retailer with over 2,000 physical locations.
Beyond the short-term slowdown, there are underlying secular trends that support long-term growth. According to the Federal Home Loan Mortgage Corporation, about half of America’s single-family homes were built before 1980. This means that despite the renovation hyper activity of the past two years, there is still plenty of renovations to come. At the same time, more than a decade of underconstruction has led Home Depot to estimate that the home supply shortage could take five years of home construction to remedy.
Combine these two forces with the millions of Millennials and Gen Zers eager to buy a home and the long-term outlook remains strong for the home improvement industry. With a P/E of 18 times 20% below its five-year average, buying Home Depot stock here would be a constructive move.