The Dow Jones Industrial Average is often put on too high of a pedestal by novice investors and ignored by professions. But this year, the Dow is the best-performing index of the four major US indices. That has me making a list of my top Dow stock picks for 2023.
Financial headlines often gravitate toward the Dow because of large point swings, hinting at significant volatility on up or down days. You know the type: Dow Surges 1,000 Points! Dow Plunges 1,200 Points Amid New Fears!
Those kinds of headlines get clicks and can draw in less-experienced traders, even when the S&P 500 has a similar percentage move. Conversely, the pros tend to ignore the Dow because it only makes up 30 stocks. It’s not as inclusive of the market as the S&P 500.
But this year, it doesn’t matter. Down “just” 7.5% on the year, the Dow is the best-performing index. It beats out the S&P 500, Nasdaq and Russell 2000, which are down 17.3%, 29.6% and 19.3% so far in 2022, respectively.
Now let’s look at our top Dow stock picks for 2023.
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One of the largest names in tech, Microsoft (NASDAQ:MSFT) is one stock to keep an eye on. While some might expect to see Apple (NASDAQ:AAPL) headline this list, I didn’t include it. For Apple’s part, it does not generate the kind of strong margins Microsoft does, nor does it have as good a growth rate.
I’m not saying I don’t like Apple, but the stock has not come down as much as Microsoft stock has, and it still faces risks out of China. That’s why when I look at our Dow stock picks for 2023, I can’t help but like Microsoft.
Consensus estimates call for just 4% earnings growth this year (FY 2023), but an acceleration up to 17% growth in FY 2024. For the company’s revenue, estimates call for 7.2% and 13% growth this year and next year, respectively.
On the plus side, Microsoft is still forecast to grow. That’s even as some investors might not assume that’s the case, given that shares suffered a peak-to-trough decline of 39% and are still down 29% from highs.
At just 25.5-times this year’s earnings, I think Microsoft looks attractive. And if shares retest the 2022 low, then I find it particularly attractive.
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Working with a “Dogs of the Dow” theory here, next up we have Salesforce (NYSE:CRM). This stock has been crushed, and the company’s latest earnings report isn’t helping.
Coming into the report, shares were down about 50%, but were up almost 18% from the lows. After a four-day 18% skid, CRM stock is now making new 52-week lows. That’s okay though, because this is a stock that’s been on my radar for quite some time.
I keep looking for Salesforce to test down into the $115 to $125 area — preferably closer to the $115 area. Here’s why.
In any market, this company has strong long-term growth, is profitable, and trades at a reasonable valuation. I think if we get some sort of capitulatory washout trade, Salesforce could be a great long-term buy.
Analysts expect about 17% revenue growth this year and 11% growth next year, alongside 3% and 14% earnings growth this year and next year, respectively. If the stock trades to $120 though, shares will trade at just 24-times this year’s earnings. That will be just too cheap to ignore.
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This is another interesting stock pick, as Disney (NYSE:DIS) has struggled mightily this year. The stock has fallen 57.5% this year, but I’m still wondering if more downside could be in store.
Specifically, I’m looking at the $80 level.
While that would mean new 52-week lows are in store, Disney is simply too attractive of a company to overlook for the long-term. Even if we are staring down a recession, Disney is diversified enough to consider taking a shot on its business.
When the company last reported earnings, Disney missed on top- and bottom-line expectations. Soon after, CEO Bob Chapek was given the boot in favor of prior CEO Bob Iger.
If Disney stock sees $80, it will trade at 19.5-times earnings. Perhaps that’s a little rich for some investors. But if it can grow revenue in the high-single digits alongside 17% earnings growth this year and almost 30% growth next year, then it will look cheap in hindsight.
On the date of publication, Bret Kenwell held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
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