For the last 127 years, the prestigious Dow Jones Industrial Average (^DJI 0.45%) has served as a leading barometer of the health of Wall Street. What was once an index dominated by a dozen industrial companies in the late 19th century has evolved into a 30-component index comprised of diverse, time-tested, multinational businesses.Thank you for reading this post, don't forget to subscribe!
Although the share-price-weighted Dow Jones managed to climb to a new all-time high at the end of 2023, the outlook for its 30 components is quite different in the new year. While two Dow stocks have turned out to be unprecedented buys in 2024, there’s another long-term component investors could easily miss.
Hand Over Fist The No. 1 Dow Stock to Buy in 2024: Walt Disney
The first no-brainer Dow Jones stock to buy in the new year is the media giant Walt Disney (DIS-0.42%).
There is no doubt about the fact that Walt Disney has faced adversity over the years. The COVID-19 pandemic severely impacted its theme-park operations and film entertainment division. Meanwhile, large operating losses from the company’s streaming services segment as well as weak advertising spending have created a challenging environment for the “House of Mouse.” However, many of these gray clouds should clear in 2024, paving the way for a surge in Disney stock.
In December 2022, China ended its controversial “zero-COVID” mitigation strategy, which included stringent and unpredictable lockdowns. Even as China’s economy is booming after years of lockdowns, Walt Disney has seen its theme-park sales growth return to normal. The further we move through the worst of the pandemic, the easier it will be for investors to recognize that Disney’s organic growth machine is back on track.
One of the key factors influencing Walt Disney’s revenue and profit growth is its unprecedented pricing power. For example, admission prices to Disneyland in Southern California have increased by more than 10,000% since the park opened in 1955. This is approximately 10 times higher than the overall rate of inflation for the US economy over the same period.
Walt Disney’s incredible pricing power is a reflection of the irreplaceability of its characters, storytelling and engagement. There are plenty of other theme parks to go to and movies to watch, but no other media company can easily bridge the generational gap to allow grandparents and grandchildren to find common ground through imagination. No ability to cross. This competitive advantage Disney brings is invaluable.
Another reason to be excited about Walt Disney’s prospects in 2024 is the expected operating improvement of its streaming segment. The company hasn’t been shy about raising subscription prices on most tiers.
Since Disney+ customers are loyal to the brand, it has seen only a minimal decline in subscribers due to its increased prices. When combined with careful cost cutting, Disney’s streaming segment is capable of turning a profit by the end of the current fiscal year (Disney’s fiscal year typically ends in late September).
Walt Disney shares can now be traded for as much as 17 times the coming year’s earnings, which remains a bargain considering the expected annual earnings growth rate of 17% over the next five years.
Dow Stock Will Be No. 2 Hand Over Fist Buy in 2024: Johnson & Johnson
Another Dow stock that investors can buy with confidence in 2024 is the healthcare group johnson and johnson (JNJ 0.15%), known as “J&J”.
While the Dow Jones Industrial Average was setting new highs in 2023, J&J was leading it lower. Its poor performance last year was due to outstanding litigation related to its now-discontinued talc-based baby powder.
Johnson & Johnson attempted to settle the case on two occasions last year, with the latest settlement totaling $8.9 billion. However, both attempts were ultimately rejected in court. People unidentified with any financial liability to J&J are apparently holding its shares.
The flip side of the above unfavorable situation is that Johnson & Johnson is one of only two publicly traded companies that has a AAA-credit rating from Standard & Poor’s (S&P), a division of the more familiar American Securities and Exchange Commission (S&P). S&P Global, This credit rating, which is one notch higher than the AA-credit rating given to the US government, reflects S&P’s utmost confidence that J&J can service and repay its outstanding debts.
J&J has more than $23 billion of cash, cash equivalents and marketable securities on its balance sheet as of October 1, 2023. It is generating over $20 billion in operating cash flow over the last 12 months. Therefore, there is little concern about the potential financial liability of the company.
What makes Johnson & Johnson such a strong buy is its continued shift toward pharmaceuticals. For more than a decade, the company has been focused on expanding its innovative-drug portfolio. Even though brand-name drugs have limited periods of sales exclusivity, they provide J&J with attractive margins and strong pricing power. Investing aggressively in innovative research and collaboration is driving the company’s profit needle upward decisively.
As I mentioned earlier, continuity in key leadership positions is also important. You can count how many CEOs J&J has had since its founding in 1886. Minimal turnover at the top means that strategic initiatives are being implemented successfully in the long term.
Ultimately, Johnson & Johnson has the price right. Opportunistic long-term investors could own J&J shares at around 15 times the coming year’s earnings. This represents its lowest forward-year earnings multiple in at least a decade.
Dow stock to avoid plague-like epidemic in the new year: Boeing
On the other hand, commercial airplane manufacturers and defense contractors boeing (BA 0.92%) has given investors every reason to stay away from its stock in 2024.
On paper, Boeing has a fairly clear runway for growth. Production of the 737 Max is projected to increase from the current 38 aircraft per month to 50 per month by 2026. The increased production should increase the company’s operating cash flows and give it an opportunity to meaningfully reduce its outstanding debt.
Additionally, oil prices remain high due to low global supply. The longer the cost of energy commodities remains above historical norms, the more likely commercial airlines will be to upgrade their fleets to more fuel-efficient jetliners.
Over the next five to 10 years, Boeing could do well for its shareholders. But it is likely to be disastrous in 2024.
Boeing is receiving a lot of attention at the moment due to an incident that occurred last weekend, involving a 737 MAX 9 jetliner, in which a portion of the fuselage separated from the plane during flight. This incident, in itself, and the subsequent grounding of other 737 Max 9 jetliners, is not why I would avoid Boeing stock in 2024. However, this is just one of many examples of Boeing running into production/quality problems with its next generation aircraft. These persistent problems have slowed Boeing’s production growth of next-generation jetliners and given investors little reason to expect a turnaround in the near term.
Boeing’s missteps can also be clearly seen in Wall Street’s consensus earnings forecast for the company. At this time last year, Wall Street was expecting earnings per share (EPS) north of $2 for 2023. When Boeing reports its fourth-quarter operating results, it is expected to close 2023 with a full-year loss. More than $6 per share. This is effectively a $5 billion reduction in company profits – yet Boeing shares have increased over the last year.
Another reason to avoid Boeing in the current year is its performance during the recession. Although US unemployment data is not indicative of a recession, some money-based metrics and forecasting tools strongly suggest that a deflationary recession is on the way for the US economy. Boeing has historically been one of the worst performers S&P 500 components during the last five recessions.
In a stock-picker’s market, where valuations matter, it doesn’t make sense to buy Boeing shares at 57 times next year’s earnings.