Although you probably don’t need the reminder, last year was Wall Street’s worst since 2008. Throughout 2022, all three major U.S. stock indexes were hurtled into a bear market.
But things weren’t quite as bad for the widely followed Dow Jones Industrial Average (^DJI), which ended last year lower by just 9%. Because the Dow is comprised of 30 generally profitable and time-tested businesses, these companies — and therefore the Dow Jones Industrial Average — are well-positioned to successfully navigate a bear market and/or economic downturn.
With economic uncertainty still high, the Dow’s 30 components can be a smart place for investors to begin their research. Just keep in mind that not every Dow component will necessarily be a winner.
As we move forward in 2023, two Dow stocks stand out as no-brainer buys for opportunistic investors, while another recently overachieving Dow component should be avoided like the plague.
Dow stock No. 1 to buy hand over fist in 2023: Johnson & Johnson
The first Dow Jones Industrial Average stock that can confidently be bought hand over fist in the new year is healthcare conglomerate Johnson & Johnson (JNJ). While J&J isn’t going to knock your socks off with its growth rate, it’s a company that continuously delivers for its shareholders in virtually any economic environment.
One reason Johnson & Johnson is on such solid foundation is because the healthcare sector is incredibly defensive. As much as we’d like to flip a switch and simply not get sick when the stock market declines or the U.S. economy weakens, life doesn’t work that way. People are always in need of prescription drugs, medical devices, and various healthcare services and products, which plays right into J&J’s core operating segments.
Perhaps the biggest catalyst of 2023 for Johnson & Johnson is the impending spinoff of its consumer health operations, which it’s named Kenvue. This segment, which accounted for roughly 16% of the company’s sales in 2021, is generally slow-growing. However, it sports excellent pricing power thanks to well-known brands like Tylenol and Band-Aid, and generates predictable operating cash flow.
Spinning out Kenvue will allow Johnson & Johnson’s pharmaceutical and medical technology segments to really shine. These are faster-growing, higher-margin divisions that might allow J&J’s earnings multiple to expand a bit.
For the past decade, J&J has been steadily shifting its sales toward pharmaceuticals. This is where the company derives most of its operating margin and sales growth. Since brand-name drugs only have a finite period of sales exclusivity, J&J has the liberty of leaning on its medical-device segment over time to offset any patent cliff concerns. Additionally, J&J’s balance sheet and abundant cash flow allow for plenty of internal drug innovation and the ability to undertake acquisitions to replenish its pipeline.
If there’s one more good reason to trust in Johnson & Johnson, it’s the company’s balance sheet. J&J is one of only two publicly traded companies with the highest credit rating (AAA) from Standard & Poor’s (S&P), a division of S&P Global. This rating suggests that S&P has the utmost confidence Johnson & Johnson can service and repay its debt obligations. J&J’s credit rating is actually one notch higher than the U.S. federal government (AA), according to S&P.
Dow stock No. 2 to buy hand over fist in 2023: Walt Disney
There’s no denying that Disney has had a rough three year-stretch. The COVID-19 pandemic was a direct threat to both its theme-park and film entertainment divisions. But with the worst of the pandemic now (hopefully) in the rearview mirror, Walt Disney can, once again, allow its competitive advantages to shine.
Maybe the most impressive thing about Disney is its pricing power. Since Disneyland opened to the public in July 1955, the price of admission has risen from $1 to $104, as of 2023. That’s a 10,300% increase when the actual rate of inflation since July 1955 is just a tad above 1,000%. Few businesses on the planet can outrun the prevailing inflation rate this much and not lose their core customer.
That brings me to the next point: Walt Disney is one of a kind. This is a company that’s able to cross generational gaps and connect with consumers in a variety of ways. There’s simply no substitute for the theme parks, characters, nostalgia, and experience Walt Disney brings to the table for parkgoers and movie-watchers.
Possibly the biggest catalyst for the company in 2023 is its streaming operations. In less than three years following its launch, Disney+ racked up more than 164 million subscribers. Including ESPN+ and Hulu, Disney has more streaming subs than Netflix. But this rapid growth has come at a cost. Namely, operating losses tied to streaming have ballooned. The expectation is that belt-tightening in this segment will yield more palatable results in fiscal 2023, as well as put the division on track for its first operating profit sometime in fiscal 2024.
Also, don’t overlook the return of Bob Iger as CEO. While it would be nice if Disney could get its succession plans in order, it’s important to note that Iger’s tenure as CEO has generally been a positive for the “House of Mouse.” As CEO, Iger oversaw the acquisitions of Lucasfilm, Marvel Entertainment, and Pixar. His return to the CEO chair should help reignite growth.
The Dow stock worth avoiding like the plague in 2023: Boeing
On the other side of the aisle is the Dow stock investors would be wise to avoid in the new year: Boeing (BA).
Clearly, Boeing has had things go its way over the past 3-1/2 months, otherwise it wouldn’t have rallied nearly 90%. Last week, the company’s 737 MAX took to the skies in China for the first time since 2019. Domestic production of the 737 MAX should also pick up in the U.S. throughout 2023, which could result in a nice uptick for the company’s operating cash flow.
A globally broken energy supply chain has been a positive for Boeing as well. Russia’s invasion of Ukraine, coupled with years of reduced capital investment in drilling, exploration, and infrastructure, has buoyed the spot prices for crude oil and lifted fuel prices for commercial airlines. In other words, it’s made the prospect of modernizing fleets all the more attractive.
However, Boeing’s recent share price surge overlooks two important macroeconomic factors. First, interest rates are rising in the U.S. at their fastest pace in more than four decades. Historically low lending rates were a boon to airline industry and Boeing. As rates rise, there’s less incentive for commercial airlines to place large orders. That’s a potential problem for one facet of Boeing’s backlog.
The other concern is that Boeing is cyclical, and the tea leaves suggest the U.S. will enter a recession at some point this year. Although not all Treasury bond yield curve inversions lead to a recession, all recessions in the U.S. since World War II have been preceded by a yield curve inversion. The latest inversion between the 2-year and-10-year Treasury yields was the largest in 40 years. If a recession arises, Boeing would likely see order weakness in most (or all) of its operating segments.
As long as we remain in a bear market, Wall Street is going to be critical of traditional valuation metrics. At a multiple of 91 times Wall Street’s forecast earnings per share for 2023, Boeing is the opposite of what investors should be looking for in a challenging investing environment.