The Dow Jones Industrial Average (^DJI -1.40%) may be up a tidy 15% so far this year, but not all 30 of the Dow stocks have logged gains. In fact, a trio of its constituents are in the red since the end of 2020, and one more is hovering near the breakeven line.
There are of course two schools of thought regarding this laggardness. The glass-half-empty folks will presume these stocks have fallen for good reasons, and are best avoided. The glass-half-full crowd will already be sizing up these beaten-down blue chips as buying prospects.
In my view, the optimist cohort is right. The Dow's worst year-to-date performers are also now its top prospects.
Those are some high-quality losers
The three companies in question are Verizon (VZ -2.91%), Walt Disney (DIS -3.52%), and Merck (MRK -0.03%), with stock prices in 2021 down 5.9%, 2.5%, and 3.1%, respectively. Walmart merits a (dis)honorable mention as well, as it has climbed back from several months in the red to sit about even year to date.
It's a surprising group of laggards because these companies are the most benign, least problematic, low-drama companies within the Dow Jones Industrial Average. To really understand what's going wrong for these stocks in 2021, however, one has to look back at how they fared in 2020.
For media giant Disney, the pandemic definitely hit the company's top line and bottom line. But it was also clear that the company was well prepared and quite capable of dealing with the worst the pandemic could dish out. It also helped that Disney had just launched Disney+ in November 2019, while its Hulu streaming service was just starting to hit its stride. Consumers stuck at home were starved for entertainment, and Disney was a familiar name to lean on. Investors sensed it too. Disney share prices actually gained 25% overall last year, and from March 2020's trough, the stock price rallied by 111% through the end of 2020.
The basis for that big rally made sense. But its sheer scope left too much profit-taking potential on the table. Now that the dust is settling, buyers are still filing out.
Verizon and Merck are considerably different stories. Rather than becoming overbought, these two stocks actually declined in 2020. Merck ended 2020 down around 10%, having never fully plugged into the rebound rally, while Verizon ended last year in the hole by about 4% versus the Dow's 7% advance.
Merck's weakness was largely due to the fact that it was never considered a key contender in the race to develop a COVID-19 vaccine. And, much of what it had been doing on that front was canceled early this year.
As for Verizon, while its business was mostly unfazed by the coronavirus -- people still needed their wireless service regardless of the macro-economic environment or the health crisis -- it simply wasn't the sort of story investors were searching for last year. Vaccines and e-commerce were hot, and any industries where business was put on hold due to the pandemic were ice cold. There wasn't enough investor interest left over for an in-between kind of company.
But nothing lasts forever.
Don't overthink it
Sometimes, finding an opportunity is just noticing something most other people haven't. These three stocks are buying opportunities now largely because the market has underappreciated them while searching for winners in other places.
Verizon, for instance, is hardly a high-growth machine, but with a dividend yield of 4.5% and a trailing 12-month P/E ratio of 11.5, there's little not to like. It's certainly on better footing than chief rival AT&T, which is still wading out of the TV and film business, licking its (expensive) wounds. Meanwhile, Verizon remains ready for the wider advent of 5G and all that brings, with an expansive fiber-optic network that's been in development for years.
These little things matter, even if they're not obvious to consumers.
Then there's Merck. Sure, it missed out on the initial tidal wave of demand for a coronavirus vaccine, and it isn't exactly positioning itself to be a later-stage vaccine powerhouse with a more effective inoculation. However, it is the company behind cancer-fighting blockbuster Keytruda and the diabetes treatments Januvia and Janumet -- just a few of the names in its large portfolio. Last year's top line improved 4% after factoring out the impact of foreign currency fluctuations, despite the logistical challenges created by the pandemic. Merck's blue-chip status is well-earned.
Even Disney shares are primed to start moving higher again now that last year's big bullish move has been reeled in.
To be fair, there's no value-based argument to be made for buying the stock now, priced as it is at more than 34 times next fiscal year's projected earnings. What Disney stock lacks in value, however, it makes up for in growth potential. The company is essentially having its way with both cable companies and movie theaters owners, and it is still able to leverage the distribution of its TV content while also debuting new feature films in theaters as well as via Disney+. It's a testament to the power of the brand. Never even mind the fact that its theme parks are finally, fully reopening.
The last word
It will always be tempting to pile into names that have been performing well recently, and it's likewise easy to eschew those that have lately performed poorly on Wall Street. Indeed, those tactics have seemed to work pretty well for over a year now.
The market has a funny way of eventually putting all stocks on their right paths though, at the right price -- particularly blue chips. These three Dow stocks are currently below their appropriate prices given their risk and reward profiles, but as you may have noticed, people, economies, and businesses are attempting to ease back toward their pre-pandemic normals. These stocks should eventually follow suit and rebound from their tepid performances.
Or, as Warren Buffett so succinctly explains: "The time to get interested is when no one else is."