It’s been a rough go for the market of late — even for the blue chips. The Dow Jones Industrial Average now sits about 9.7% below its early January high and remains within easy reach of new multiweek lows. And for a handful of Dow names, the past few weeks have been much, much worse.
Investors with long-term mindsets aren’t viewing the glass as half empty, however. Market veterans know the time to buy quality names is when they’re beaten down, even when it’s uncomfortable to do so. To this end, three of the Dow Jones’ worst performers at the moment should be able to recover the sell-off they’ve experienced because the markets will soon realize they shouldn’t have suffered these drops in the first place. Let’s take a closer look at each one to see why this is the case.
Nike (NYSE: NKE) is the world’s largest athletic-footwear brand. It’s no slouch on the athletic-apparel front, either. The company is projected to sell more than $47 billion worth of goods this year, up nearly 6% from last year’s tally, before accelerating top-line growth to almost 14% next year. Profits are growing similarly.
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Simply put, it’s a juggernaut.
Investors appear to have forgotten this of late. Share prices are down a third from November’s highs, with the most recent selling linked to Russia’s invasion of Ukraine and the economic effect the world’s response is having on various sectors. Indeed, the stock’s well into new 52-week low territory now and seems to still be going lower. Priced at only 25 times next year’s consensus earnings estimate, though, Nike shares may be better-positioned to rebound than the market bears seem to think.
The key to this rebound is the company’s slow-but-steady shift away from retailing partners and toward distribution self-sufficiency. In Nike’s recently completed fiscal second quarter, $4.7 billion of that quarter’s revenue came from its direct-to-consumer business. By bypassing retail stores, the athletic-apparel giant captures all of the difference between wholesale and retail pricing. Look for the organization to continue expanding its direct-to-consumer footprint, which should continue to benefit the bottom line.
Nike operates 116 stores in Russia, by the way, which the Wall Street Journal reports are closed for the time being. Those stores represent about 19% of all international stores Nike operates, so it could have some temporary effect on Nike’s international business, which makes the direct-to-consumer alternative all the more important to Nike’s continued success.
2. JPMorgan Chase
JPMorgan Chase (NYSE: JPM) isn’t just a major banking name — it’s the country’s biggest bank, boasting $2.6 trillion worth of domestic assets under management, or $3.3 trillion when factoring in its assets held overseas. And that’s just its conventional-banking business. Its investment banking and wealth management operations are not considered in the tally. In an industry where size means clout, JPMorgan’s got plenty of it.
Investors haven’t been impressed by JPMorgan’s clout for a few weeks now. The stock price is down 17% in just the past month and down nearly 24% since early November. Investors are concerned that rampant inflation will slow economic activity by forcing a rise in interest rates that will slow the borrowing that the bank relies on. The military conflict in eastern Europe only piles on the worries of less economic activity in the areas JPMorgan operates in.
That’s a viewpoint, however, that misses a very important counterpoint about the banking business, in general, and the lending business, in particular: Rising interest rates makes lending a more profitable venture even if there might be somewhat less of it. With eight to nine quarter-point increases of the Fed Funds rate predicted between now and the end of 2024, JPMorgan Chase’s net interest income could be poised for more growth than anybody sees coming.
In the meantime, newcomers will be buying the stock while it’s sporting a solid dividend yield of 3.1%. Not bad.
Finally, add McDonald’s (NYSE: MCD) to your list of Dow Jones stocks primed to bounce back after being unnecessarily up-ended. Shares are down more than 15% year to date.
McDonald’s is the world’s biggest restaurant chain, consisting of more than 40,000 mostly franchised locales as of the end of last year. Its golden arches are one of the most recognized logos in the world, and the organization has turned food-taste consistency into an art form. It’s all part of a brilliant marketing mechanism that makes McDonald’s restaurants go-to destinations for millions of consumers every single day.
Right now, this machine is feeling some tension between the corporation and the franchisees that operate roughly 37,000 of the chain’s 40,000 stores. Managing a franchise in the current economic environment doesn’t come cheap with rising wages, production costs, and required store updates hitting the top and bottom lines. Add to the concern that these operators pay above-average franchise fees and royalties and don’t actually own their own real estate. Rather, they’re forced to rent their buildings from the parent company. That’s why McDonald’s is often considered a real estate company rather than a fast-food chain.
The thing is, these above-average franchise fees, rents, and royalties are worth it because operators are plugging into an above-average brand. Quick Service Restaurant magazine says McDonald’s stores each generate average annual revenue of $2.7 million, but more than that, most of its locations are consistently profitable for the franchisee — something that’s far more difficult for other fast-food chains to say.
Like Nike, McDonald’s has shuttered its stores in Russia until further notice. It’s not a major blow, though. It’s costing the company a relatively modest $50 million per month. The fast-food giant generates approximately $23 billion worth of revenue per year. The sell-off suggests investors think the impact of the Ukraine crisis is much larger than it really is.
These three Dow Jones names aren’t the only worthy stocks to step into at depressed prices, of course. They’re just the most noteworthy. If you’re willing to do a little digging, you’ll find plenty of other opportunities. The key is being willing to take a chance on some quality companies and buy them when they’re down. In other words, buy quality when it’s on sale.
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