In less than two weeks, on May 26, Wall Street will have to break out the birthday candles (126 of them!) for the iconic Dow Jones Industrial Average (^DJI 0.00%). What began as a 12-company index that was concentrated in industrial stocks in 1896 has evolved into a 30-component index featuring some of the most profitable and time-tested companies on the planet.
Admittedly, the Dow isn’t perfect. It’s a share-price weighted index, which means market cap is irrelevant. This allows insurer Travelers Cos., with a $41 billion market cap but a $172 share price, to exert more influence on the index than the largest publicly traded company (Apple, which sports a $2.46 trillion market cap but “only” a $152 share price).
But flaws aside, it’s an index with a rich history of making patient shareholders richer. That’s why the recent sell-off in the Dow Jones Industrial Average of 12% makes for such an intriguing buying opportunity. The following three time-tested stocks all look like surefire buys during the Dow Jones sell-off.
The first Dow stock to consider buying into this correction is payment processor Visa (V -1.21%).
Some of you may be scratching your head and wondering why I’d suggest buying a cyclical company at a time when inflation is historically high and the prospect for a recession in the U.S. appears to be growing. The answer is simple: Periods of economic expansion last disproportionately longer. Even though recessions are an inevitable part of the economic cycle, they usually last for no longer than a couple of quarters. This allows a cyclical company like Visa to take advantage of the natural expansion of U.S. and global gross domestic product (GDP) over time.
To add to the above, Visa is positioned perfectly to benefit from historically high inflation. With businesses and consumers forced to spend more to purchase the same amount of goods and services, the total payment volume traversing Visa’s processing network looks poised to climb.
It also doesn’t hurt that Visa is the unquestioned payment processing leader in the No. 1 market for consumption in the world: The United States. According to Securities and Exchange Commission filings from the four major U.S. credit card networks, Visa was responsible for 54% of credit card network purchase volume in 2020. That was 31 percentage points higher than its next-closest competitor.
Something else important to the Visa growth story is that the company shuns lending. Though it would have no trouble generating interest income and fee revenue if it were to become a lender, the company would also be exposed to loan delinquencies during recessions. Not having to set aside capital during economic downturns is a massive competitive advantage that allows Visa to bounce back faster than virtually any other financial stock.
With shares down 23% from their all-time high, now looks like as good a time as any for bargain hunters to do some picking.
Walgreens Boots Alliance
A second highly profitable Dow stock that’s been beaten down recently but looks like a surefire buy is pharmacy chain Walgreens Boots Alliance (WBA -0.44%). Walgreens is the smallest Dow component by market cap ($38 billion).
Since the beginning of the year, shares of Walgreens are lower by 19%. There’s concern about consumer spending being stifled by inflation, as well as how Walgreens will grow once the pandemic boom fades. As a reminder, Walgreens is one of a handful of pharmacies to see a boost in customer traffic, thanks to COVID-19 inoculations and booster shot campaigns. While these are tangible concerns, they fail to look at the bigger picture.
What’s more exciting for Walgreens’ shareholders (myself included) is the company’s multipoint growth strategy, which emphasizes higher margins, organic growth, and a grassroots effort to improve customer engagement.
The interesting thing about boosting margins through cost savings and lifting organic growth is that both can be done simultaneously. When the company’s fiscal 2021 year came to a close on Aug. 31, 2021, it reported more than $2 billion in annual cost savings a full year ahead of schedule. Yet at the same time it was cutting costs, Walgreens was also spending aggressively on direct-to-consumer/digitization initiatives. While its physical stores will always generate the bulk of its revenue, beefing up online ordering is a no-brainer way for the company to lift its organic growth rate.
The real differentiating factor for Walgreens Boots Alliance is the company’s partnership with, and majority investment in, VillageMD. The duo has opened 102 co-located healthcare clinics, with the goal of reaching more than 600 in over 30 U.S. markets by the end of 2025. These clinics are physician-staffed and capable of handling far more than administering a vaccine or caring for a sniffle. The expectation is that this grassroots effort to draw repeat patients should pay off handsomely for the company’s pharmacy segment.
Even if Walgreens experiences a bit of a post-COVID-19 vaccination campaign lull, its sub-9 earnings multiple to Wall Street’s 2022 forecast makes it a screaming buy.
The third time-tested company that looks like a surefire buy during the Dow Jones sell-off is money-center bank JPMorgan Chase (JPM -0.09%).
Similar to Visa, the single biggest concern hovering over bank stocks is the potential for a U.S. recession. When recessions rear their head, it’s typical for banks to experience an increase in delinquent loans and charge-offs. With U.S. first-quarter GDP retracing 1.4%, the table is set for an official economic contraction.
However, bank stocks like JPMorgan Chase have a few tricks up their sleeve to succeed. As noted, cyclical stocks like banks generally benefit from long-winded economic expansions. Even though things can be rough for a few quarters during a recession, loan growth and deposits tend to pick back up and sustain for years afterward.
Perhaps the most exciting development for JPMorgan Chase is the Federal Reserve getting aggressive with interest rates to tame high inflation. When the nation’s central bank raises its federal funds target rate, the interest rates on variable-rate outstanding debt climb as well. Banks don’t have to do a thing, but they will see existing variable-rate loans generate more net interest income due to the Fed’s hawkish monetary policy.
Another positive for JPMorgan Chase is the company’s digital push. At the end of March, the company noted an 11% increase in mobile active customers from the prior-year period. In general, online and app-based banking transactions cost a fraction of what in-person and phone-based interactions run. Continued investment in digital banking initiatives should lead to improved operating efficiency.
Bargain hunters seeking a quality bank stock can currently scoop up JPMorgan Chase for less than 10 times Wall Street’s forward-year earnings forecast. Best of all, they’ll net a 3.3% yield while they wait sit back and wait for JPMorgan to, once again, outperform.