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Is It Too Late to Buy the Dow Jones' 3 Best-Performing August Stocks?

By Billy Duberstein - Sep 7, 2020 at 7:41AM

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These three Dow winners are each big name brands with bright futures. But have they run too far?

The Dow Jones Industrial Index is often seen as a barometer of the largest U.S. industrial stocks. This month, the index got quite the shakeup, with three new additions displacing three other longtime index stalwarts. Coming into the index are salesforce.com (CRM -4.27%), Amgen, and Honeywell, while ExxonMobil, Pfizer, and Raytheon exited.

Apple's (AAPL 0.23%) 4-for-1 split prompted the move. Since the index is a price-weighted index, not market cap-weighted, the stock split reduces Apple's weighting and that of the technology sector within the Dow. According to S&P, the addition especially of Salesforce would help keep technology weighting in line to "help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy,"

The Dow is also coming off a great August -- in fact, it was the Dow's best August since 1984. And among the outperformers were both the aforementioned Salesforce, Apple, and athletic powerhouse Nike (NKE -3.68%). But after their stellar month, should you pick up these all-star brand stocks today or look elsewhere for better value?

Green  letter saying DOW with upward-pointing arrows.

Image source: Getty Images.

Salesforce

Salesforce was a monster in August, up nearly 40%. Some of that gain came on the enthusiasm that it would be added to the prestigious Dow Jones and that a wave of "forced buyers" would come into the stock. However, Salesforce also earned its stripes with a handy earnings win on Aug. 25. Revenue was up 29%, and adjusted (non-GAAP) earnings per share came in at $1.44 -- both well ahead of analyst expectations.

It appears that Salesforce's portfolio of digital transformation applications is still in demand during the pandemic, and the demand may have even accelerated. The company also touted public sector victories such as in the state of Rhode Island, which needed to get a command center up and running quickly amid COVID-19. The company also raised its guidance for fiscal 2021, ending in January, to a range of $20.7 billion to $20.8 billion in revenue, or approximately 21% to 22% growth, with adjusted EPS of $3.72 to $3.74, up from previous guidance of $2.93 to $2.95.

However, investors should be aware that that adjusted earnings figure doesn't include stock-based compensation, which the company estimates will total $2.35 per share this year -- or more than half those earnings. In addition, I've never owned Salesforce because of its reliance on inorganic growth. Of course, this has been a mistake, as Salesforce has done quite well over the past few years. The seemingly sky-high valuations it's been paying for companies such as Tableau and Mulesoft do appear to be justified by the astronomical rise of the technology sector this year. However, investors should be aware that this is the last quarter Salesforce will get the added growth boost from Tableau, which the company bought last year on Aug. 1. On an organic basis, Salesforce projects its end markets to grow by roughly 14% overall over the next five years.

Trading at roughly 70 times this year's projected non-GAAP EPS -- a figure that even overstates earnings, because of stock-based compensation -- Salesforce is a bit too expensive for me after its massive August run. However, it's definitely a good company leading digital transformation worldwide, so investors should keep it on the watchlist for any large pullbacks.

Apple

Not to be outdone, Apple (AAPL 0.23%) was the second-best performing Dow stock in August, up 21.4%. I'd be careful of Apple even after last week's sell-off, which only gave back part of these massive gains. August's run came after Apple had already had a terrific year, and the stock was up 75% through Aug. 31. This last leg of the journey seems to have come in anticipation of the company's stock split, which happened Aug. 31 and was announced on the company's second-quarter earnings release.

Investors should know that when a company splits its stock, it doesn't add or subtract from its intrinsic value at all. Some may believe that a lower share price will bring in a new wave of retail investors who can afford the cheaper stock, but most online brokerages are now offering fractional share buying anyway. 

A big board listing the different stock indexes and their price movements.

Image source: Getty Images.

It's probably not a coincidence that CEO Tim Cook recently sold the entire stock award grant he just received for his performance as CEO just before the stock split, netting him about $131.7 million. Of course, Cook still owns a lot more stock and will receive another stock grant next year, but to sell all of that stake is still a fair chunk of change.

I think Apple is a terrific company that investors should hold for the long term, but today's valuation looks a bit stretched to me at around 31 times 2021 projected earnings. As such, long-term investors should probably just hold their shares, while buyers may wish to wait for a better entry price.

Nike

Sneaker and athletic wear giant Nike (NKE -3.68%) also posted a strong August, with the stock up about 14.6% for the month. Though the company had posted some ugly-looking numbers for its latest quarter in June, investors were apparently encouraged by the prospect of a second stimulus round, along with the prospect of athletic wear and athleisure as the work-from-home trend continues. As the leading brand in this trend, Nike also has leading direct-to-consumer offerings, which can leverage its brand and financial strength.

During August, no financial news came from the company, but shoe retailer Foot Locker (FL -3.23%) posted some better-than-feared numbers, which also helped Nike by association. In addition, Nike announced a partnership with leading NFL stars to make a free athletic training tool called 11-Online, which may have garnered some more enthusiasm.

Like many other familiar name brands, Nike rose in August, but like those other brands, its stock is expensive. The stock currently trades at a whopping 70 times earnings and 49 times next year's earnings. Even going back to pre-pandemic 2019, the stock is trading around 45 times 2019 earnings. Analysts are expecting a return to growth in 2022, but Nike's current price is still at around 34 times those 2022 estimates.

That seems a bit too expensive for me at this point, even though I like Nike longer-term. In addition, a second stimulus bill has seemed to stall out in Congress, so that recovery in sales from a new round may prove elusive.

A common theme

No doubt, Salesforce, Apple, and Nike are high-quality companies, but each was bid up to very high valuations in August. As such, each is a no-go for me right now, though investors should be looking to pick up any of these names should we get another big market sell-off.

Billy Duberstein owns shares of Apple and has the following options: short September 2020 $160 calls on Apple. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Apple, Nike, and Salesforce.com. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.25 (0.23%) $0.39
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$181.65 (-4.27%) $-8.10
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$109.80 (-3.68%) $-4.20
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$90.99 (2.29%) $2.04
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$91.98 (0.86%) $0.78
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$49.88 (0.61%) $0.30
Honeywell International Inc. Stock Quote
Honeywell International Inc.
HON
$194.35 (0.20%) $0.38
Amgen Inc. Stock Quote
Amgen Inc.
AMGN
$248.52 (0.50%) $1.23
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$28.89 (-3.23%) $0.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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