Last month, the iconic Dow Jones Industrial Average (DJINDICES:^DJI) donned its party hat and celebrated its 125th anniversary. After more than a century, it remains one of the most widely followed indexes, even if it’s inherently flawed.
The reason the Dow Jones is followed so closely has to do with the 30 high-caliber companies that make up the index. These diverse companies are profitable, time-tested industry leaders. In other words, these are stocks that tend to increase in value over time.
As we move headlong into June, three Dow stocks stand out as particularly intriguing values that can be bought hand over fist by patient investors.
Although the Dow comprises companies from a variety of sectors, tech stocks stand out from the pack this month. Perhaps no Dow component is more of a screaming buy right now than Microsoft (NASDAQ:MSFT).
I know what you’re probably thinking: “Microsoft is lugging around a $1.85 trillion market cap. What sort of upside can it really offer?” While the rule of big numbers would seemingly not be in Old Softy’s favor, we’re talking about a $1.85 trillion company that’s consistently growing by a double-digit percentage every single year.
Microsoft’s secret sauce for success is the company’s focus on high-margin cloud-based services and subscriptions, as well as its inorganic growth potential. In terms of the former, Microsoft is delivering double-digit growth almost across the board. Cloud infrastructure services platform Azure has been the star, with year-over-year sales growth of 50% in Microsoft’s March-ended quarter. But it also delivered double-digit cloud segment growth from its Office Commercial, Dynamics, and Windows Commercial segments.
In terms of inorganic growth, Microsoft is able to take far more chances than most companies, as exemplified by its deal announced in April to buy Nuance Communications for $19.7 billion. Microsoft is one of only two public companies to hold the AAA credit rating with Standard & Poor’s, it generated $72.7 billion in operating cash flow over just the trailing 12 months, and it has $125 billion in cash and cash equivalents on its balance sheet. Even if only a handful of Microsoft’s acquisitions are winners, that’s more than enough to broaden its sales channels and bring in an array of new customers.
Your eyes are not deceiving you. This really says IBM (NYSE:IBM), which is one of the most chronically underperforming tech stocks over the past decade.
The big issue with IBM is that it was late to the party in making the transition to cloud computing. Being weighed down by its legacy software, IBM has seen its year-over-year sales decline in virtually every quarter over the past seven years. With conditions perfect for high-growth stocks to thrive, IBM has simply been an afterthought in the tech space.
But times are changing, and IBM is finally keeping up. Through a combination of organic innovation and acquisitions, such as Red Hat, the percentage of revenue derived from the cloud has been rising considerably in recent years. In the March-ended quarter, IBM generated $6.5 billion in aggregate cloud revenue, which was up 21% from the previous year. This $6.5 billion accounted for approximately 37% of total sales. That’s important for one big reason: Cloud and cognitive software profit margin was 76% in the first quarter, whereas its legacy segments offer profit margins of around 30%. These higher profit margins will allow IBM’s cash flow to grow at a faster pace than its sales.
However, it should be noted that IBM has done a pretty good job with a tough situation. It has aggressively reduced costs in its legacy divisions to boost margins and generate ample cash flow. This is allowing IBM to reduce its debt and pay a hearty 4.5% yield.
IBM has taken close to a decade to reinvent itself, but it looks to have finally crested the hill. That gives long-term investors the green light to jump back into the highly profitable Big Blue.
Salesforce provides cloud-based customer relationship management (CRM) software. In simple terms, CRM software helps consumer-facing businesses access information in real time. It can be used for logging client information, following up on service issues, managing online marketing campaigns, and predictive analysis of customer buying habits. It’s software that makes obvious sense for retailers and hotels, for example, but is catching on big-time in the healthcare, financial, and industrial sectors.
When it comes to CRM software, Salesforce sits atop the mountain. According to IDC estimates from the first half of 2020, Salesforce controlled almost 20% of global CRM revenue share. This was approximately four times higher than the next-closest competitor, and it’s more than the Nos. 2 through 5, combined.
Salesforce is growing inorganically, too. After a number of masterful acquisitions (e.g., Tableau and Mulesoft), the company is in the midst of acquiring cloud-based enterprise communications platform Slack Technologies in a $27.7 billion cash-and-stock deal. Though Slack’s platform will add a new channel of high-margin subscription services, the true value is in being able to cross-sell CRM solutions to Slack’s small and medium-size client base.
With Salesforce on track to hit $50 billion in annual sales in five years (it yielded $21.3 billion in sales last year), it remains one of the most-exciting mega-cap growth stocks to own.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.