Since its inception in 1896, the Dow Jones Industrial Average (^ DJI 0.00%) has established itself as the barometer of stock market health. The index, which was made up of a dozen industrial stocks at the end of the 19th century, is now a 30-component index containing highly profitable and diversified multinational companies.
But just because the Dow is made up of 30 mature stocks doesn’t mean it can’t make patient investors much richer. With the Dow Jones down 19% from its all-time high close in 2022, and the S&P500 producing its worst first-half return in more than 50 years, bargains abound for opportunistic investors.
Of those 30 must-haves, three Dow stocks are screaming buys in August.
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Johnson & Johnson
The first Dow Jones stock just begging to be bought in August by long-term investors is a healthcare conglomerate Johnson & Johnson (JNJ -0.35%). While J&J may not offer the mind-boggling growth potential of tech stocks, it has been a stable source of income for decades and it will certainly help you sleep easy at night.
One of the benefits of health actions is that they are defensive. No matter how the economy and/or the US stock market performs, there are people who will always need prescription drugs, medical devices and consumer health products. This provides a baseline level of demand for Johnson & Johnson’s operating segments.
What you may not know about J&J is that it is one of only two publicly traded companies that boasts the coveted AAA rating from Standard & Poor’s credit agency. (S&P), which is part of S&P Global. S&P is more confident that Johnson & Johnson will service and repay its debts than virtually any other company or entity in existence, including the US government, which has an AA credit rating.
But the real key to J&J’s success is its perfectly hedged operating model. For example, Johnson & Johnson generates the majority of its sales, growth and operating margin through the sale of brand name drugs. However, branded therapies have a limited period of sales exclusivity. To counter this, J&J can leverage its medical devices segment, which is perfectly positioned to take advantage of an aging domestic and global population. If a brand name drug loses its exclusivity, many other revenue channels can increase and compensate for short-term weakness.
To further demonstrate Johnson & Johnson’s consistency, consider that it has increased its base annual payout for 60 consecutive years – only a handful of publicly traded companies offer a longer consecutive streak – and increased its annual operating profit. adjusted annually for more than three decades before the COVID-19 pandemic.
Although it may be a boring business these days, J&J is a true wealth maker for the patient.
JPMorgan Chase
The second Dow stock that stands out as a screaming buy in August is the money center bank JPMorgan Chase (JPM -1.00%). While bank stocks are normally banned when the winds of recession blow, things could be very different this time around.
In each of the past two quarters, the gross domestic product (GDP) of the United States has declined. Although the official eight-person committee that declares recessions has yet to do so, consecutive declines in GDP are generally considered by the investment community to be a recession. During economic downturns, banks often face increased loan delinquencies and higher write-offs, and are typically required to set aside capital to cover future loan losses.
However, we are in uncharted territory when it comes to Federal Reserve monetary policy, and that should favor banks like JPMorgan Chase. With inflation hitting a 40-year high of 9.1% in June 2022, the country’s central bank has no choice but to raise interest rates quickly to rein in rising prices. In doing so, the Fed is rolling out the red carpet for bank stocks to collect more net interest income on their outstanding floating rate loans. Even if delinquent loans increase, the positive impact of additional net interest income should outweigh the negative effects.
Another reason to be excited about JPMorgan Chase’s potential is its investments in digitalization. The company said active mobile customers (those who used their account digitally in the last 90 days) increased 11% in the June quarter compared to the year-ago period. Online and app-based transactions are considerably cheaper for banks than face-to-face or phone interactions. Investing in digitization will help JPMorgan become a more efficient bank over time.
The bread and butter of bank profits also continues to work in favor of JPMorgan. Ultimately, banks that can grow their deposits and grow their credit outstanding without a noticeable decline in credit quality should become more profitable in the long run. The company’s loans and deposits increased by 7% and 9% respectively compared to the prior year period. Again, this is good news with rising interest rates.
While there are cheaper bank stocks, relative to book value, few have performed as well as JPMorgan Chase over the past decade. Paying a 33% premium to book value (i.e. 133% of book value) and around 9 times Wall Street’s projected earnings for 2023 is an attractive entry point for long-term investors .
Image source: Getty Images.
Walgreens Boot Alliance
The third Dow stock that is a screaming buy in August is the drugstore chain Walgreens Boot Alliance (WBA 0.68%).
As I noted with J&J, healthcare stocks are almost always immune to economic downturns because they are defensive stocks. But in the case of Walgreens, the closings that have accompanied COVID-19 have dramatically reduced foot traffic in its stores. Since Walgreens relies on its physical locations for most of its sales, it has been reasonably impacted by the pandemic. But the good news is that management has taken a host of actions to ensure Walgreens is on the fast track to recovery and steady organic growth.
Over the past few years, Walgreens has been implementing a multi-pronged strategy to improve its balance sheet, drive organic growth, and grow its Walgreens Health segment, which should help it connect with customers locally and build customer loyalty. .
Regarding the first, the company sold its drug wholesale business to AmerisourceBergen in June 2021 for cash and stock. It uses this capital to reduce the debt on its balance sheet. Additionally, Walgreens cut annual operating expenses by more than $2 billion, a full year ahead of schedule.
While cost-cutting is a common strategy employed by turnaround stocks, Walgreens is also going on the offensive. It is investing aggressively in its digitization efforts, which include promoting online sales and drive-thru pickup. In its most recent fiscal quarter (ended May 31, 2022), digital sales grew 25%, which the company attributed to 2.8 million same-day pickup orders.
But perhaps the most exciting growth channel for Walgreens Boots Alliance is its partnership with VillageMD. This dynamic duo has opened 120 co-located full-service health clinics at Walgreens locations, as of May 31, with plans to have 1,000 clinics in place by the end of 2027 in more than 30 U.S. markets. They are medically staffed clinics, which sets them apart from other in-store health clinics that usually handle vaccinations or nothing more serious than a sniffle. These clinics are expected to attract regular patients to its stores and build customer loyalty.
With Walgreens valued at less than 8 times Wall Street’s forecast earnings for fiscal 2022 and analyzing a return of nearly 5%, it’s the perfect blend of value and income for patient investors.
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