The Best Dow Jones Stocks Through Q2
The Best Dow Jones Stocks Through Q2
Three Dow components are up more than 10% so far in 2018 but not all of them are outsized winners
By Luke Lango, InvestorPlace Contributor
In the stock market, momentum is a very real thing. Stocks that are losers are usually losers for a reason, and they can stay losing for a while. On the flip side, stocks that are winners are usually winners for a reason, and they can stay winning for a while.
As such, when looking for the best investments in a crowded stock market, a good place to start is the stocks that have performed the best so far this year. An even better place to start is the big stocks that have performed the best through the second quarter.
The 30 companies in the Dow Jones Industrial Average are traditionally considered to be the 30 biggest and most powerful companies in the world. So if you’re looking for a list of big stocks that have performed well, just look at the best performers in the Dow.
Below is a list of the Dow’s top 3 stocks so far in 2018.
Can they continue to rally for the rest of 2018? Let’s take a deeper look.
Best Dow Stocks Through Q2: Cisco Systems, Inc. (CSCO)
The top-performing Dow stock so far in 2018 is blue-chip tech giant Cisco Systems, Inc. (NASDAQ:CSCO), which is up 14% year-to-date.
The big gains in CSCO stock have been driven by a combination of improvement in the company’s underlying operational results, huge tax reform benefits, and a cheap valuation.
On the operational front, CSCO has reported back-to-back double beat quarters that underscore that things are improving for the business. The company is shifting away from legacy solutions and towards software and subscriptions.
We have seen this rodeo before, most notably in fellow blue chip tech giant Microsoft Corporation (NASDAQ:MSFT). Microsoft successfully made that transition over the past several years, and MSFT stock has exploded higher as a result.
There are certainly signs that Cisco could be in the early innings of a similar turnaround. Revenue growth has come back into the picture. Whereas revenues were in decline for most of 2017, revenue growth has come back in 2018. In the second quarter of fiscal 2018, revenue growth was 3%. That number is expected to rise to 4% in the third quarter.
Meanwhile, gross margins are tracking higher thanks to the software and subscription shift, which is inherently higher margin.
This growth should continue into the foreseeable future. The company is a play on growing complexity in IT infrastructure thanks to the emergence of the Internet-of-Things (IoT) and its integration with public and private cloud networks. As this complexity scales, demand for solutions which simplify and tie everything together should grow. This is what CSCO primarily offers.
Moreover, the company is expected to be a huge beneficiary of tax reform. All that extra capital freed up thanks to a lower tax rate is going back to shareholders via buybacks and dividends. Last quarter, the company hiked its dividend by 14% while authorizing an additional $25 billion in share buybacks.
Considering these sizable tailwinds, CSCO stock is still pretty cheap at just 17-times forward earnings. The dividend yield is below its 5 year average, but not by much. All in all, CSCO stock doesn’t look overvalued here. Indeed, it looks like there is more room to run for this Dow winner.Best Dow Stocks Through Q2: Intel Corporation (INTC)
The second best performing Dow stock so far in 2018 is another blue chip tech giant, Intel Corporation (NASDAQ:INTC). INTC stock is up 13% year-to-date.
Much like Cisco, Intel is currently undergoing what management calls its biggest transition in company history. INTC, which has historically been a company that supplies component for PCs, is now shifting away from that PC-centric business and morphing into a data-centric business.
That is a critical transition. The PC business is all dried up. Everyone who wants a computer already has one. There really isn’t anymore growth left in that market.
But things are booming on the data side of things. The mainstream emergence of the Internet-of-Things and smart devices has created an explosion in demand for the type of stuff Intel creates.
Moreover, all those smart devices are generating data, and that data needs to be stored somewhere, so cloud data centers have become a huge thing recently. Those cloud data centers also operate on the stuff Intel creates.
Intel’s data business also touches markets like AI and automation, two big-demand markets still in their early stages.
Therefore, INTC’s data business is benefiting from a convergence of multiple demand tailwinds. That is why revenues on that side of the business are growing by more than 20% year-over-year. For comparison, the PC business is basically flat.
We are currently at a positive tipping point in that transition from PC to data. Right now, the revenue split between data and PC is roughly 50/50. If current trends persist, then that split will turn into 60/40, 70/30, 80/20, so on and forth, in the not too distant future.
That means that INTC’s overall growth profile will start to look more like the data business (20%-plus growth, booming margins) than the PC business (3% growth, flattish margins). At just 15-times forward earnings, INTC is pretty cheap considering the aforementioned growth prospects.
As such, INTC stock, like CSCO, should continue to be a big winner for the remainder of 2018.
Best Dow Stocks Through Q2: Boeing Co (BA)
The third best performing Dow stock so far in 2018 is industrial giant Boeing Co (NYSE:BA). The company best known for making planes is up just over 10% on the year.
What has been driving the huge rally in BA stock? General enthusiasm in the airline and defense markets.
An explosion in the experience-first mantra among consumers is having a positive effect on airline traffic globally. Moreover, China’s massive urbanization boom means that more people than ever are starting to fly in China. Today, one of out every four Boeing planes produced is being shipped to China.
This growth has longevity. More than 80% of people in the world have never taken a flight, implying that there is a tremendous growth opportunity ahead for Boeing on the airline front.
Meanwhile, rising international tensions (see North Korea, Russia, and China) are causing many countries to up their defense and military spends. For the first time since 2010, global sales of arms and military services grew in 2016. With tensions only rising, we are likely looking at a streak of growth years ahead.
Lockheed Martin Corporation (NYSE:LMT) is the biggest player in this space. But Boeing is number 2, implying big growth ahead.
Then there is also the whole tax reform angle. Boeing will save a ton of money thanks to tax reform. But it will also win because there is a bunch of extra cash floating around in the world, and with so much free cash out there, airlines and other companies will likely put that money towards big-ticket purchases, like Boeing’s planes.
Recently, though, trade war fears have weighed on BA stock. And the stock is trading at a super high valuation relative to historical standards.
All in all, this isn’t my favorite Dow stock to own here and now. The time to buy was a year ago. At this point, the valuation seems to reflect the reality of an improving global economic backdrop. That backdrop is threatened by trade war fears, and if those fears come true, then BA stock could drop. If they don’t come true, then BA stock could rebound, but not by much considering its already stretched valuation.
Overall, risk-reward feels skewed to the downside at these elevated levels.
As of this writing, Luke Lango was long INTC.