The Dow Jones Industrial Average which is made up of many of the most well known and biggest companies of the world, was up 5.4% last week, in what was a big comeback week for equities, snapping its losing streak.
But with the Dow still down 14% this year, the question begets – is it time to buy the biggest losers of the Dow? Here we look at the 5 biggest losers of the Dow and try and figure out whether it is time to buy these stocks.
| Company | Ticker | Market Cap (S$’b) | P/E ratio (times) | YTD performance (%) | 5 Year performance (%) |
| Cisco Systems Inc. | NASDAQ:CSCO | 182.6 | 15.5 | -30.7 | 39.8 |
| Home Depot Inc. | NYSE:HD | 290.9 | 18.0 | -30.8 | 84.3 |
| Boeing Company | NYSE:BA | 83.7 | – | -33.2 | -29.9 |
| Nike Inc. | NYSE:NKE | 177.7 | 29.9 | -35.8 | 84.4 |
| Walt Disney Company | NYSE:DIS | 178.1 | 67.5 | -38.4 | -9.0 |
1. Cisco Systems (NASDAQ:CSCO)
Cisco is primarily an enterprise networking solutions company focusing on networking solutions and equipment. Cisco provides end to end security and with a huge current focus on hybrid work, it has focused its business segments targeting enterprises’ requirements in these two segments.
Much like any other tech company, it is also devoting efforts to building the internet for the future, focusing on its expertise with offerings such as routed optical networking and public 5G networks. It also has applications such as the well known Cisco Webex as well as other softwares used to provide the network connectivity and security.
In Cisco’s Q3 FY22 earnings release, while it met its guidance for Non-GAAP measures such as gross margin, operating margin and earnings per share, it missed its own revenue forecasts provided just a quarter earlier as Ciscso guided for a 3% to 5% increase however it delivered flat revenue performance. It was mainly due to a decline in both EMEA and APJC regions.
Cisco also revised its full year outlook downwards, reducing total revenue growth from a 5.5% to 6.5% range to a 2% to 3% range. Cisco also reduced its Non-GAAP earnings per share estimate by nearly 5%.
It cited reasons such as supply chain issues, in part due to the continued lockdown in China as well as the Russia Ukraine conflict. It also recently announced that it is leaving Russia due to the Russia Ukraine Conflict.
While share prices are down 30% YTD due to these issues, it may still not be the time to buy Cisco yet as there is uncertainty to its FY2023’s performance although it could deliver surprises to the upside in future quarters once there are improvements to the supply chain issues.
2. Home Depot (NYSE:HD)
Home Depot is possibly the world’s largest home improvement retailer with more than 2,300 stores across North America, including the US, Canada and Mexico with an estimated 17% market share.
Home Depot’s share price was hit as rising interest rates means increased mortgage rates, affecting both Home builders and home improvement retailers as demand for new houses is expect to decrease. Inflation woes have also affected many retailers in both the consumer staple and discretionary spheres as many companies are now sitting on high inventory levels at higher costs and some are even unable to sell through their inventory or increase prices.
Rising interest rates not only means higher cost of funding for homebuyers but also for Home depot. In addition, many consumers who spent the early days of the pandemic carrying out various home improvement projects probably do not have to repeat this for the near future. This uncertainty meant that prospective customer trends are uncertain for Home Depot.
But unlike many other companies, Home Depot saw its recent 1Q22 results beat expectations and provided a revised sales growth guidance of 3.0% vs a previous expectation of sales growth to be just slightly positive. Operating margin is also forecasted to increased from 15.2% to 15.4% with earnings per share growth to be in the mid single digit percentages instead of low single digit percentages.
We think that increasing revenue forecasts and more impressively its operating margin forecasts in a high inflation environment attest to the company’s strength, while it is true that broader macroeconomic factors at play are affecting the share price, we think that it is not time yet but it could almost be time to look at Home Depot as once these broader issues start to look better, as a company like Home Depot that is revising guidance upwards in challenging times is one to look out for.
3. Boeing (NYSE:BA)
Boeing is a leader in aviation, aerospace and defense technology and its products and services include commercial and military aircraft, satellites, defense systems, launch systems, advanced information and communication systems,
Boeing is well known for its eponymous planes such as the Boeing 787, Boeing 737 and Boeing 737. With a total revenue of $62.3 billion in 2021, the commercial airplanes segment only accounts for $19.5 billion or 31%. Its Defence, Space and Security segment is actually the biggest contributor with 42% share while its Global Services segment accounts for the rest.
This may come as a surprise to many and it is mainly because commercial airplanes production rates have reduced significantly in recent years. In 2019, this segment was the largest revenue contributor before revenues halved in 2020 due to the pandemic.
Boeing’s Defence, Space and Security and Global Services segment have been highly resilient throughout the last few years as revenues remained stable.
Boeing’s share price YTD decline of nearly 30% meant that its 5 year share price return is also negative.
The commercial segment is expected to recover with higher Boeing 787 and 737 deliveries as travel continues on its recovery path and more airlines take delivery of backlogs while the other two segments remain stable, Hence this could be the time to buy Boeing as its revenue would likely see growth this year barring any unforeseen circumstances.
4. Nike (NYSE:NKE)
The image above, which is a snapshot from Nike’s investor relations website has impressed us with its strong mission statement. It is clear, concise and spells out what Nike is (or wants to be) and what it wants to achieve.
Nike is probably the largest and most popular athlete footwear, apparel and sports equipment company and on top of the Nike brand of products, it also owns the Converse and Jordan brands.
Nike is also one of the many companies to announce its full exit from Russia after suspending its operations there a few months ago.
Similar to Home Depot, Nike, who just released 4Q22 results on 27th June was also one of those companies who beat expectations. 4Q22 revenues were down 1% (up 3% on currency neutral basis) due to North America & China, with gross margin decreasing 0.8% to 45% due to high inventory obsolescence and continued elevated freight costs. The decrease was much lower than other competitors at only 0.8% as Nike carried out strategic pricing actions and even saw margin expansion in its direct business.
This margin expansion in its direct business was in part due to a decision made by Nike earlier this year to decrease its wholesaler sales and focus more on its direct to consumer business which has paid off so far.
Nike anticipates first-quarter revenue will be flat to slightly up versus the prior year, as it continues to manage Covid disruption in China. Nike anticipates full-year revenue will grow by low double-digits percentages on a currency-neutral basis.
While Nike did well, due to the weak demand in North America & China affecting its forecast, we think it in the short term it looks like it is not living up to its mission statement. With a current P/E ratio of nearly 30x, we think we should wait a little more before considering Nike as we are not sure if the current market sentiments would support a 30x P/E stock without much revenue growth.
5. Walt Disney (NYSE:DIS)
Disney is one company that has no doubt been affected by the pandemic, the key question on everyone’s mind has to be whether Disney will see better days as we gradually recover from the pandemic.
Disney is one of the biggest entertainment conglomerates in the world with just too many well known brands and content, providing for various medium of entertainment, such as theme parks, studio contents (movies), cable television, streaming services.
While segments such as parks and studio content are clearly on the recovery track, Cable television and Streaming services may see a hit. The streaming segment has been especially competitive with players like Netflix, Amazon Prime and HBO Max in the picture. We recently wrote about Netflix here which should give a perspective on the current challenges that Disney’s streaming services faces.
Disney as a recovery play was well reflected in its 2Q22 earnings release where Revenue for the quarter grew 23% and diluted EPS(excluding one offs) increased nearly 37% as revenue from parks more than doubled.
Although Disney+, its streaming service saw a 7.9 million subscribers’ growth to 137.7 million subscribers, results were poorer at Disney+ due to higher programming and production, marketing and technology costs, partially offset by an increase in subscription revenue due to subscriber growth and increases in retail pricing.
Disney’s shares have declined nearly 37%, the most in the Dow as investors are concerned over streaming growth and the possibility of recession impacting consumer confidence and the capacity for discretionary spending. We are contrarians on this and we think it is time to buy Disney as it is one company that will continue to benefit significantly from the reopening theme.
Closing statement
The 5 biggest losers in the Dow have all fallen more than 30% this year, more than double the Dow’s decline of about 14%. However only 2 of the 5 have seen a negative 5 year performance as the US economy has been relatively robust in the past few years with investor and consumer confidence at strong levels.
These 5 companies are the biggest losers for a variety of reasons. As these companies are also one of the biggest players in its field, if not the biggest, the reasons for their underperformance such as the pandemic, inflation and supply chain constraints are well known and likely impact its peers as well.
For Boeing and Walt Disney, it seems to us that it is the time to buy as the reason for buying outweighs reasons not to, while for Cisco, Home Depot and Nike we think we could wait a little longer.