In 2022, the Dow Jones-30 basement dwellers are a group of companies that typically hang out in the attic.
Conversely, the widely followed benchmark’s leaders include names that struggled to find their footing in the early part of the decade. Chevron’s link to higher oil prices and the cheap valuations of defensive healthcare stocks Merck and Amgen make these stocks the Dow’s lead horses heading into the second half.
At the back of the pack are three of the index’s four consumer cyclical names (with the less economically sensitive McDonald’s the fourth). It's no coincidence that these are the Dow’s laggards at a time when inflation caused the University of Michigan’s consumer sentiment reading to slip to a record low.
And with the market increasingly braced for a recession amid an aggressive Fed rate hike campaign, things can seemingly only get worse for the consumer discretionary sector. Maybe not.
With share prices depressed and the Street seeing brighter 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 Dow’s caboose with a negative 38% year-to-date return. Its share price has been cut in half from last year’s record peak due to a mix of concerns that, while valid, aren’t commensurate with the magnitude of the selloff.
While ramped investments in original content will lead to elevated 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, the time is now 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 subscriber and market share gains.
In the theme park business, much of the worry has been around renewed closures in China where restrictions are now easing. 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 trending up.
Yet it is Disney+ that is the company’s biggest growth opportunity—and one that is underappreciated despite a run of stellar subscriber additions (compared to subscriber losses at Netflix). As the spat with the Florida government and other near-term pressures subside, 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. It is on pace to close lower for the seventh consecutive month, something that hasn’t happened since 2016. Note that roughly five years after the 2016 slump, the stock tripled.
It’s not unreasonable to think that history can repeat itself and Nike will be a $300 stock by 2027. But it’ll have to be one step at a time for the global sneaker king. Management must first work through supply chain disruptions and weakness in the all-important Greater China market. It must also prove that increased spending on its digital capabilities and DTC business are fruitful.
As Nike continues to form a more direct connection with its passionate customer base, the financial results should follow. There aren’t any demand issues to see here and the company’s ability to raise prices in an inflationary environment should allow it to breeze through an economic downturn.
So while the market is focused on uncharacteristically low profit growth in the current fiscal year, a peek at what’s ahead suggests a Nike comeback is afoot. Wall Street is projecting 21% EPS growth in fiscal 2023. This could very well pave the way 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 considering much of the ascent was driven by the unusual demand environment sparked by pandemic home renovations. Shares of the home improvement retailer have also been slowed by rising transportation and wage costs in addition to concerns that higher interest rates will cool a hot housing market.
Yes, home repair and remodeling activity is likely to slow in a contractionary period. The same goes for home building activity and thereby demand for lumber, tools, paint, and appliances. A recession isn’t ideal for any retailer that has more than 2,000 brick-and-mortar locations.
Looking beyond the near-term slowdown, there are underlying secular trends that are supportive of long-term growth. According to the Federal Home Loan Mortgage Corporation, approximately half of U.S. single-family homes were built prior to 1980. This means that despite the hyper renovation activity of the last couple years, there is still plenty of upgrade work ahead. At the same time, a decade-plus stretch of underbuilding has Home Depot estimating that the home supply shortage could require five years of homebuilding to rectify.
Combine these two forces with the millions of Millennial and Gen Zers itching to buy a home and the long-term outlook remains solid for the home improvement industry. With an 18x trailing P/E that’s 20% below its five-year average, buying Home Depot stock here would be a constructive move.
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