The Dow Jones Industrial Average has fallen 16% this year and contains blue chip stocks that are now generating attractive valuations. Some Dow Jones stocks have performed worse than others, but today’s worst performers could be tomorrow’s best investments. Here are three cheap Dow Jones stocks you should seriously consider.
Apple becomes more profitable every year
Warren Buffett started accumulating shares of Apple (AAPL -2.03%) in 2016 and bought more in the first and second quarters of this year as stocks tumbled. He considers the company “probably the best company…in the world”.
Apple controls about 50% of the smartphone market in the United States and a good share of the global market. But perhaps it’s the services added by iPhone customers that make the company more profitable every year. For a small fee, iPhone users can download music from the Apple Music app, make contactless payments with Apple Pay, and store their photos in their iCloud storage.
All of these add-on services are digital, which means that each new customer costs Apple very little. Therefore, each additional revenue dollar from a new service customer is more profitable than the previous one. In 2017, when Apple first disclosed the data, its services gross margin was 55%. That’s more than the 35.7% gross margin of products like iPhones, Macs, and iPads. By 2021, Apple’s services gross margin had soared to nearly 70%.
Services gross margin had a noticeable impact across the business. During the same period, Apple’s gross margin fell from 38.5% to 41.8%.
New American Express Customers Might Surprise You
Buffett’s relationship with American Express (AXP -3.11%) goes back even further than its history with Apple. He bought 5% of the company in 1962 for around $20 million when the company became entangled in what came to be known as the “salad oil scandal”. After some additional buying and selling over the years, the stake is now worth more than $23 billion.
These days, American Express is best known as the go-to credit card for people who love to travel. Its cardholder services include perks like discounts on streaming services, frequent flyer miles and free luxury airport suites for those long layovers. American Express cardholders rave about the company’s customer service.
The stock has a few advantages. First, business travel is increasing significantly. Spending is expected to rise 34% year-over-year in 2022 to $933 billion. This number is still below the 2019 pre-pandemic mark of $1.4 trillion. So the potential for growth remains as the world begins to normalize again.
Plus, American Express isn’t your parents’ credit card company anymore. Its fastest growing cohort is Millennials, Gen Z and Gen X. These customers are at a point in their careers where income and ability to spend will increase for many years to come.
Nike has a lasting advantage
Buffett likes the powerful brands owned by Apple and American Express. Although Buffett no longer owns shares of Nike (NKE -2.57%), the company’s brand awareness is still on par with these two Buffett actions. Nike began building its brand in 1984 when the company signed NBA rookie Michael Jordan to a sponsorship deal. The legendary Hall of Famer’s popularity propelled Nike into the upper echelon of athletic footwear and apparel.
Since then, Nike has repeated the formula for decades signing other superstars like LeBron James, Kevin Durant and Cristiano Ronaldo. Nike has grown its empire to a level where competitors like Adidas and under protection don’t have the resources to recruit high profile stars like Nike can.
The dollars Nike pays for its suite of superstar athletes allows it the luxury of charging extra for its footwear and athletic gear. This extra pricing power makes Nike roughly twice as profitable as its competitors.
Nike’s position in the industry should allow it to maintain an industry-leading operating margin (revenues minus items such as raw materials, advertising and salaries) as long as the sport remains one of the most popular events in the world. Still, Nike’s stock is down 38% this year. Don’t be surprised if the Oracle of Omaha recovers beaten Nike stock over the next few quarters.
But are stocks cheap?
Apple shares are down around 13% this year and trade at a price-to-earnings ratio of less than 26 times. Buffett was a buyer in the first two quarters of the year, and investors priced similarly to Buffett. If the rating was good enough for the Oracle of Omaha, it should be good enough for anyone.
Shares of American Express are also down and now trade at a price-to-earnings ratio of 16 times. That’s a 25% reduction from its five-year average. With multiple growth levers, over the long term, stocks look cheap.
Nike stock has been the worst performer of the three this year, down 38%. But it could have one of the most enduring competitive advantages. The stock now trades at a price-to-earnings ratio of 28x, a 40% discount to its five-year average.
If you’re a blue-chip investor looking for bargains, the Dow Jones is a great place to start looking now. These three stocks offer significant upside potential for long-term investors. As such, if you’re investing for the long term, you should consider buying these Dow Jones stocks while they’re still cheap.
American Express is an advertising partner of The Ascent, a Motley Fool Company. BJ Cook has no position in the stocks mentioned. The Motley Fool holds positions and recommends Apple, Nike and Under Armor (C shares). The Motley Fool recommends Under Armor (A-shares) and recommends the following options: $120 long calls in March 2023 on Apple and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.