2 Dow stocks to buy and 1 to avoid in the fourth quarter
For over 125 years, the Dow Jones Industrial Average (DJINDICES: ^ DJI) has been a barometer of the health of the stock market.
Although it started as an index of 12 companies in May 1896, it is now made up of 30 highly profitable multinational companies from a wide range of sectors and industries. While the Dow Jones itself is an imperfect index – it is weighted by stock prices rather than market cap – it nonetheless continues to rise over time and therefore attracts a lot of attention from Wall Street and investors. .
Among its 30 constituents are two Dow stocks that investors can buy hand-to-hand in the fourth quarter, as well as a widely owned company that would be best avoided to end the year.
Buy this Dow stock: Salesforce
If there is one Dow stock that I would strongly encourage investors to explore in Q4, and well beyond for that matter, it’s the provider of customer relationship management (CRM) software solutions based on the cloud. Salesforce.com (NYSE: CRM).
Without getting too technical, CRM software is used by businesses with direct contact with consumers to improve existing customer relationships and drive sales. Beyond simple logging and accessing real-time customer data, it can be used to oversee online marketing campaigns and run predictive analytics to determine which customers are most likely to purchase new products. or services. While the service industry has long been the most logical provider of CRM solutions, we are seeing the adoption of non-traditional sectors and industries.
Cloud-based CRM software sales are expected to increase by a double-digit annualized percentage at least by the middle of the decade, and Salesforce is at the peak of this high-growth trend. When the curtain closed in 2020, Salesforce was responsible for 19.5% of all global CRM spending, according to IDC. By comparison, numbers 2 to 5 in the global share didn’t even match Salesforce’s share of the landscape. While anything is possible in the tech space, this advance in market share seems virtually insurmountable for the foreseeable future.
CEO Marc Benioff also deserves high praise for successfully completing a number of profit-generating acquisitions. The takeovers of MuleSoft, Tableau, and Slack Technologies have all broadened the Salesforce ecosystem and broadened its appeal to the small and medium businesses that make it work.
Between the potential for organic growth and a steady pattern of acquisitions, Benioff forecasts full-year revenue of $ 50 billion by fiscal 2026. This would represent an increase from $ 21.3 billion announced for fiscal 2021. Large-cap stocks rarely grow at such a rate, which is why Salesforce is such an intriguing buy for the fourth quarter.
Buy this Dow stock: Walgreens Boots Alliance
A second Dow stock to buy in the fourth quarter is the drugstore chain Alliance of Walgreens boots (NASDAQ: WBA).
In general, health stocks are insensitive to economic vagaries. Since we have no choice about when we get sick or what disease (s) we develop, there is a relatively constant demand for medicines, devices and health services, regardless of the environment. economic. Drugstore chains like Walgreens were an exception to this rule during the pandemic. Since pharmacies depend on foot traffic in their stores, the coronavirus has taken a financial hit on the entire industry. The good news, however, is that that short-term pain is now in the rearview mirror.
What should boost Walgreens’ valuation is the multi-point turnaround plan that was implemented over a year ago. As might be expected, management is striving to improve overall operational efficiency, which means reducing costs where it makes sense. By the end of fiscal 2022, the Walgreens Boots Alliance is expected to achieve annual savings of over $ 2 billion.
However, the company has spent aggressively in other areas. In particular, the focus is on digitization. The pandemic has been a stern reminder that direct-to-consumer sales must be a priority, even for an industry that has long relied on its physical locations to drive results. Although it only represents a small percentage of total sales, online revenue can be an opportunity for consistent double-digit growth in the future.
Plus, don’t overlook the July 2020 announcement that Walgreens is partnering with VillageMD to open up to 700 full-service clinics co-located at Walgreens stores in more than 30 U.S. markets. The key differentiator here are “full service” clinics. With clinics staffed by physicians, the move is expected to attract repeat customers and reignite growth opportunities for Walgreens’ higher margin pharmacy.
With a futures price-to-earnings ratio of around 9 and a return of 4.1%, Walgreens Boots Alliance is the value stock you don’t want to miss out on in the fourth quarter.
Avoid this Dow action: Apple
On the flip side, a widely held Dow stock best avoided in the fourth quarter is the linchpin of innovation. Apple (NASDAQ: AAPL). Keep in mind that when I say “avoid” I am not suggesting that people sell their existing shares in the company. On the contrary, I predict Apple will encounter a handful of short-term headwinds that could temporarily weigh on its valuation.
As many of you know, Apple does a lot of things right. It is no coincidence that this is the most valuable publicly traded company. Apple enjoys an exceptionally strong global reputation and its iPhone is the most popular smartphone purchased in the United States. If you need more proof of Apple’s appeal, take a look at the lines that surround Apple stores whenever a new product debuts.
However, the world’s most valuable company also faces extremely difficult year-over-year comparisons for its best-selling product, the iPhone. Last year, Apple introduced its first 5G-enabled smartphone, and the device flew off store shelves faster than Wall Street could blink. The company has generated record sales for its flagship product, as consumers want to upgrade their devices to take advantage of faster download speeds.
The recently unveiled iPhone 13 offered only modest changes from its predecessor. While there are new colors to choose from, along with a faster processing chip and better camera, the move from iPhone 12 to iPhone 13 isn’t as groundbreaking as what we saw last year. Apple is likely to have a hard time meeting or exceeding last year’s iPhone sales numbers.
The other problem is the growing likelihood that Capitol Hill Democrats will pass a major infrastructure bill that will raise marginal corporate tax rates. Currently peaking at 21%, the corporate tax rate would need to be between 25% and 28% to pay the hefty infrastructure bill. Normally, a slightly higher corporate tax rate could be swept under the rug. But with Apple’s earnings per share set to practically stagnate in fiscal 2022, any tax reform could reverse its results. Since Apple is not particularly cheap, a lack of earnings growth could weigh on its valuation.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.