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Is It Time to Buy the Dow Jones' 2 Worst-Performing Stocks in March?

By James Brumley - Apr 2, 2021 at 9:00AM

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Most of the time, earnings-based valuations don't mean much. This isn't one of those times.

The good news is, the Dow Jones Industrial Average ended up logging a solid 6.6% gain in March, despite the wobbly start to the month. It even hit a record high just a few days ago. The bad news is, not every Dow component did as well as the index itself. Walt Disney (DIS -0.70%) and Nike (NKE 1.47%) held the Dow Jones Average back in March, with losses of 2.3% and 1.4%, respectively.

There are, of course, two schools of thought about the performance disparity. On the one hand, some investors now see Nike and Disney as relative bargains. On the other hand, this weakness may be a red flag of sorts, suggesting neither name has much upside left to give right now.

If you find yourself split between these two points of view, this will make it easier for you: Neither name is a buy at the moment.

Businessman standing on a falling chart, watching it sink.

Image source: Getty Images.

Both stocks are expensive regardless

Don't misread the message. Both companies are fine. Nike remains the leading brand of the athletic apparel arena, and Disney is still the king of premium entertainment. Each is going to be around for a long, long time.

The notion that you should never try to optimize your entry point into a new position, however, has faded over time while volatility has ramped up. These days, it's not crazy to hold off on buying a stock after an emotionally charged, fear-based rally (the fear of missing out) that's carried a ticker to an extreme valuation.

Take Disney, for instance. While pandemic-related restrictions clearly took a toll on its film and theme park businesses, they also set the stage for huge success on the streaming front. Disney+ now boasts more than 100 million paying subscribers in just a little over a year since its launch. It's been such a success, in fact, that the company is now prioritizing streaming above all else.

Investors love the move, of course, bidding up share prices to the tune of 50% since the paradigm shift first took shape in October. But those investors bought into the premise without crunching the numbers. Although the streaming focus is arguably the right one, it's going to be a long and expensive journey. Walt Disney shares are now trading at nearly 40 times next year's projected profits, and roughly 27 times analysts' profit outlook for 2024. That's rich no matter how savvy the new streaming bent is.

Nike's in a similar situation.

Investors are understandably celebrating the fact that its direct-to-consumer efforts are doing well. Indeed, its direct sales reached $4 billion last quarter, accounting for almost 40% of its top line. Digital (online) sales soared more than 50%. Both are strong indicators that not only will Nike survive the so-called retail apocalypse, but it may also be better off forging its own connection with consumers.

The triple-digit percentage gain its shares have logged since last March's low driven by investors' appreciation of Nike's initiative, however, leaves the stock priced at 63 times the company's trailing earnings and more than 33 times next year's projected income. That's a steep price to pay for any stock, but a particularly steep one for shares of a company logging single-digit sales growth and average income growth in the teens.

Take the hint about these 2 Dow components

While neither Nike nor Disney may be right-priced for newcomers, that doesn't necessarily mean current shareholders should sell them. Aside from potential tax implications, exiting a position means you'll have idle cash that needs to be put to work somewhere else but put to work in a way that doesn't wreck your portfolio's diversification profile. As was noted above, both companies are going to be around for the indefinite future.

Assuming you have the choice, though, these two Dow stocks are picks to put on your watch list for a purchase at a later date, and at a lower price point.

In fact, although the Dow Jones Industrial Average is within easy reach of another record high, a careful look at each stock's chart says both are already struggling to support their frothy valuations. Nike shares are still closer to the multi-month low hit late last month, while Disney shares have tumbled nearly 10% on two separate occasions this year already. Both are subtle hints that the market isn't completely ready to continue supporting their rich valuations.

Still, investors should bear in mind this sort of valuation-based caution isn't the norm. It's the exception to the norm rooted in extreme volatility.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$102.42 (-0.70%) $0.72
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,261.90 (0.03%) $8.77
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$108.00 (1.47%) $1.56

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

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