3 Dow Laggards Poised for a Second Half Comeback

In 2022, the inhabitants of the Dow Jones-30 basement are a group of companies who usually spend time in the attic.

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By contrast, the leaders of the widely followed reference include names who struggled to find their place in the first part of the decade. Chevron’s link to higher oil prices and cheap valuations of defensive health stocks Merck and Amgen make these stocks the Dow’s main horses towards the second half.

At the back of the package are three of the index’s four cyclical consumer names (with McDonald’s the least economically sensitive quarter). It’s no coincidence that these are the Dow’s lags at a time when inflation caused the University of Michigan consumer sentiment reading to fall to an all-time low.

And with the market increasingly poised for a recession amid an aggressive Fed rate hike campaign, it looks like things can only get worse for the discretionary consumer sector. Maybe not.

With depressed stock prices and the street seeing brighter prospects in 2023 and beyond, a turnaround is approaching for these three unusually delayed Dow.

Will Walt Disney shares be recovered?

He Walt Disney Company (NYSE: DIS) is the Dow van with a negative yield of 38% to date. The price of its shares has been halved from last year’s record high due to a mix of concerns that, while valid, are not commensurate with the magnitude of the sale.

While increased investments in original content will lead to high media production and programming costs, they will ultimately improve Disney’s competitive position in the ultra-competitive broadcast space. With a wave of new entrants to the market and Netflix showing signs of vulnerability, now is the time to spend on digital entertainment companies. Disney’s urgent focus on its direct consumer channel will ultimately be well-founded and will lead to continued subscriber gains and market share.

In the theme park business, much of the concern has been about the renewed closures in China, where restrictions are now being reduced. Parts of the Shanghai operation have reopened and, except for another setback, the key asset will soon be back in full operation. Meanwhile, traffic trends at Disney’s American parks are on the rise.

However, Disney + is the company’s biggest growth opportunity, and one that isn’t valued despite a number of stellar subscriber additions (compared to Netflix subscriber losses). As the fight with the Florida government and other short-term pressures subsides, investors will realize that Disney’s 2023 P / E 17x is “a small valuation after all.”

Is Nike Stock a Long-Term Purchase?

NIKE, Inc. (NYSE: OF) has fallen 34% this year and the second-worst-performing Dow. It is about to close lower for the seventh consecutive month, something that has not happened since 2016. Note that approximately five years after the fall of 2016, the stock tripled.

It’s not unreasonable to think that history can repeat itself and Nike will be worth $ 300 in 2027. But it will have to be one step at a time for the world king of sneakers. Management must first work with supply chain disruptions and the weakness of Greater China’s important market. It must also demonstrate that the increase in spending on its digital capabilities and DTC business is fruitful.

As Nike continues to form a more direct connection with its passionate customer base, financial results should follow. There is no demand problem to see here and the company’s ability to raise prices in an inflationary environment should allow it to overcome an economic recession.

So while the market is focusing on unusually low profit growth during the current fiscal year, a look at what’s ahead suggests that Nike is on the move. Wall Street forecasts EPA growth of 21% in fiscal year 2023. This could pave the way for another multi-year bullish run.

Will Home Depot shares recover in the second half?

After making big gains in each of the last three years, The Home Depot, Inc. (NYSE: HD) has dropped 32% in 2022. The decline was inevitable given that much of the rise was driven by the unusual demand environment caused by pandemic home renovations. The home improvement retailer’s actions have also been slowed by rising transportation costs and wages, in addition to concerns that higher interest rates will cool a hot real estate market.

Yes, home repair and remodeling activity is likely to decline in a period of contraction. The same goes for the activity of housing construction and, therefore, the demand for wood, tools, paint and appliances. A recession is not ideal for any retailer who has more than 2,000 brick and mortar locations.

Looking beyond the short-term slowdown, there are underlying secular trends that support long-term growth. According to the Federal Home Loan Mortgage Corporation, approximately half of U.S. single-family homes were built before 1980. This means that, despite the hyperactive renovation activity of the past two years, there is still much work to be done ahead. . At the same time, another decade of underbuilding makes Home Depot estimate that the shortage of housing supply could require five years of housing construction to rectify.

Combine these two forces with the millions of Millennial and Gen Zers who want to buy a home and the long-term prospects remain solid for the home improvement industry. With an 18x rear P / E that is 20% below its five-year average, buying shares of Home Depot here would be a constructive move.

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