Investing

2018 Dow Laggards Could Offer Material Upside Into 2019

Jon C. Ogg

Published: July 2, 2018 11:05 am

Last Updated: January 11, 2020 9:35 pm

Many investors want to buy stocks when they feel they are cheap, but many of those same investors freeze like a deer in the headlights after bad news or after a market correction takes those stocks lower. It’s the age-old conundrum of buying when it feels bad versus buying when everyone is happy about the stock market. With the Dow Jones industrial average down almost 2% so far in the first half of 2018, some value-oriented investors might want to consider some of the more-trodden Dow stocks for upside later in 2018 or even into 2019.

Many investors track the so-called Dogs of the Dow for the highest dividend yields of the Dow stocks. Other investors track what some might call the “pigs of the Dow” as the top laggards of the index. After all, great companies that get beaten down do not always stay down forever. And some come back on strong with a vengeance.

Warren Buffett is considered to be one of the greatest investors of the modern age, and his mantra has been to invest in quality companies at the right price. It turns out that some stocks are sold off during periods of uncertainty for the right reason, but some stocks fall victim to the analogy of throwing the baby out with the bathwater. What if some of the Dow’s biggest disappointments in 2018 are actually hiding as the great value stocks trading at too deep of a discount to analyst price targets and to recent highs?

24/7 Wall St. ran a screen of the Dow’s biggest laggards in the first half of 2018, and it turns out that all those stocks down double-digits or close to it have analyst target prices that imply serious upside for the coming 12 months. Consensus analyst price targets (mean) and forward price-to-earnings ratios have come from Thomson Reuters, while trading history and performance data have come from Finviz.

3M

3M Co. (NYSE: MMM) may be a victim of trade war fears or maybe a strong dollar, or perhaps it’s just an industrial name that needed to see its valuation come down. 3M shares were down over 16% in the first half of 2018, and this company has a history of growing its dividend every year (even during recessions). With shares at $196.72, 3M has a 52-week trading range of $191.44 to $259.77, and they are now down almost 25% from its highs.

The consensus analyst price target on 3M is $212.30, but that consensus target was closer to $240 back in April when shares were higher. 3M shares are now valued at just under 19 times expected earnings for a lower multiple than investors have had to pay since late 2016.

Procter & Gamble

Procter & Gamble (NYSE: PG) is hard to consider a value stock at about 18.5 times expected earnings. After all, it’s a slow-grower in consumer products at a time when private label brands are fighting established brands and when international trade matters. Still, it has a solid set of brands that may be all but irreplaceable, and this stock has already recovered 10% from its lows in 2018.

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The company also keeps raising its dividends, even in recessions. Trading at $78.06, Procter & Gamble has a 52-week range of $70.73 to $94.67 and a consensus analyst target of about $81.50. For whatever it’s worth, activist Nelson Peltz is in this company now too, and his price is closer to $90, with ambitions of the stock being worth over $100 based on past peer comparisons.

Caterpillar

Caterpillar Inc. (NYSE: CAT) is a trade war victim that now has given back much of 2017 gains. Its shares are down about 14% after the first half of 2018 with a price of $135.67, but its shares are almost 22% lower than its recent highs of $173.24. Analysts still have their consensus price target up at $172.00 or so, as they have yet to ratchet expectations down.

Unfortunately for Caterpillar’s investors, they are going to find out how slower global growth, tariffs, trade retaliation, a strong dollar and international competition hit the stock all at once. It was closer to $95 a share at the start of 2017, and investors need to consider that Caterpillar is valued at less than 13 times expected 2018 earnings.

Goldman Sachs

Goldman Sachs Group Inc. (NYSE: GS) has suffered a lack of investor interest in 2018 as the rise in interest rates has met a flattening yield curve at the same time that global growth is slowing, trading revenues could be tempered and even as the firm goes more mainstream with its Marcus retail banking products. The most recent Federal Reserve “CCAR” stress test was deemed to be harder than expected on Goldman Sachs for 2018, and that means that its 1.5% dividend yield is likely to remain rather muted compared to banking peers.

Shares of the firm also known as “Golden Slacks” were down almost 13.5% in the first half of 2018 and down 20% from its recent highs, but its $220.57 share price compares with a 52-week range of $214.64 to $275.31. The consensus target price is closer to $274. That higher price may require a lot of the pro-growth agenda issues to come back on the table, and that remains in limbo.

Walmart

Walmart Inc. (NYSE: WMT) may be the most nimble and strongest physical retailer that can fight a world that seems to only care about the impact of Amazon, but Walmart shares were down about 13% during the first half of 2018. The retailer just seems to keep running into same-store sales issues, and it is in a period when it is willing to potentially overspend to make acquisitions that will help drive the direction in the next decade.

At $85.65 a share, Walmart is actually down an even worse 22% from its recent all-time high of $109.98. The consensus target price is up at $95.12, and Walmart also pays investors a dividend yield of 2.5%, while it keeps raising its dividend and buying back stock. Walmart is valued at almost 18 times expected current year earnings estimates.

Johnson & Johnson

Johnson & Johnson (NYSE: JNJ) is supposed to be a defensive stock in medical, pharmaceuticals and consumer products that grows its earnings and dividends year after year. Shareholders have paid little attention to that as the megacap stock was down 13% in the first half of 2018 as well as down over 17% from the all-time high. At $121.34 a share, Johnson & Johnson has a 52-week range of $118.62 to $148.32 and a dividend yield of almost 3% now. The consensus price target currently is close to $143.57.

Walgreens

Walgreens Boots Alliance Inc. (NASDAQ: WBA) is the newest member of the Dow industrials after GE was booted out, and that inclusion in the index took place just a few days ahead of Amazon’s announced acquisition of PillPack that will get Amazon into the pharmacy business (of sorts). This and some weakness earlier on have now put Walgreens shares down over 17% so far in 2018. At $60.01, Walgreens shares have a 52-week range of $59.07 to $83.89. That also puts the stock down almost 30% from its 52-week high.

Walgreens has seen many analysts downgrade the stock and cut price targets based on Amazon, and the latest consensus target of $73.73 is down from roughly $81 just a month earlier. If the lesson Kroger holds up from the Whole Foods acquisition were to remain static, it could spell trouble for Walgreens shares — then again, Whole Foods was an established player and leader in organic and natural foods while PillPack is still an infant in the business growth cycle.

GE

As mentioned, General Electric Co. (NYSE: GE) has been booted out of the Dow and replaced by Walgreens, but even the most critical investor likely still would consider the conglomerate to be a blue chip stock. GE shares were last seen down 22% so far in 2018, which would make it the worst Dow stock had it not been jettisoned from the index.

GE now is going to unlock the value of its health care business, which will make for close to a $70 billion company according to some analysts. And GE is expected to unload its majority stake in Baker Hughes, a GE Co. (NYSE: BHGE) after it exits health care. GE closed out the first half of 2018 at $13.61 and has a 52-week range of $12.61 to $27.59, but the consensus price target (even with all the cautious ratings considered) is closer to $17.21 for a year ahead. GE also pays north of a 3% dividend yield.

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It turns out that 18 of the 30 Dow stocks were negative in 2018. Other key Dow stocks that were in the red for the first half of 2018 were seen as follows on a total return basis that includes the impact of dividends:

• Travelers: −9.8%
• McDonald’s: −8.9%
• IBM: −8.9%
• DowDuPont: −7.4%
• Verizon: −5%
• Coca-Cola: −4.4%
• JPMorgan: −2.5%
• Walt Disney: −2.5%
• United Technologies: −2%
• American Express: −1.3%
• Exxon Mobil: −1.1%

Stay tuned.