Despite the turbulence surrounding the stock market to start 2022, the Dow Jones Industrial Average has demonstrated its sturdy nature, only dropping roughly 2% for the year.
^DJITR data by YCharts
Compared to the Nasdaq Composite and the S&P 500 with their respective 8% and 4% drops to start the year, the Dow looks as stable as ever.
However, despite the Dow outperforming its peers so far this year, three of its components have seen declines of over 10% in the first month of 2022. Today we will look at these three stocks and determine if their sell-offs are opportunities to buy or early warning signs for long-term issues.
Image source: Getty Images.
1. Cisco Systems
With over 85% of global internet traffic running across Cisco Systems (CSCO 0.44%) connections, the $240 billion company is one of the most powerful of our time. Furthermore, 98% of Fortune 500 companies use Cisco's software and solutions, highlighting that it passes the "snap test."
This test is a thought experiment where you ask, would this company be missed if it were to disappear overnight? Thanks to these figures and the sheer power Cisco holds as "the worldwide leader in technology that powers the internet," this answer seems to be a resounding yes. Additionally, Comparably ranks the company as the 21st strongest technology brand, despite not having the advantage of being consumer-facing like many of the companies ranked above it.
However, despite its massive size and splendid intangibles, Cisco has started to see revenue growth slow over the last decade.
CSCO Revenue (TTM) data by YCharts
Despite 16 separate acquisitions since 2020, the company posted modest revenue growth of 8% year over year for the first quarter of 2022. This slowing growth, paired with a downgrade citing limited upside from analysts at Goldman Sachs in January has left Cisco shares down around 12%.
However, its promising "Internet for the Future" product category grew by 46% year over year to $1.3 billion in sales. This segment should grow more critical in time as high internet speeds and low latency become increasingly vital, and it currently only makes up roughly 11% of its total sales.
All in all, Cisco Systems offers investors a stable investment proposition, especially with 10 consecutive years of dividend growth and a 2.7% yield. Best yet, this strong dividend only results in a payout ratio of 45%, hinting at the potential for further dividend growth and perhaps even Cisco becoming a Dividend Aristocrat 15 years from now.
2. Home Depot
Ranking 40th on Comparably's Top Brands for Millennials, Home Depot (HD 0.74%) is a rare non-technology-focused company that seems to resonate with the younger generation. Best yet for investors, the home improvement juggernaut has been firing on all cylinders, growing third-quarter revenue by 10% year over year.
Leading this charge was comparable store sales growth of 6% year over year for Q3, which saw every week in the quarter post positive comps. But as promising as this revenue growth was, Home Depot's 23% earnings-per-share growth for the quarter was even more impressive -- highlighting its improving profitability.
HD Return on Invested Capital (3y Median) data by YCharts
This strengthening profitability is visible via Home Depot's return on invested capital (ROIC), which measures the profits a company generates compared to the assets needed to create them. The higher this percentage the better, with anything above 10% considered good, making Home Depot's current mark of 41% outstanding.
Furthermore, an increasing ROIC has historically been an excellent indicator for finding outperforming stocks over the long term. For example, since Home Depot's ROIC has consistently improved over the last decade, it is no surprise that its stock has jumped over 700% in that time, compared to the S&P 500's return of just above 200%.
Thanks to this climbing ROIC, the ever-increasing aging homes in the U.S., and a well-funded dividend of 1.8%, Home Depot looks to be a terrific core holding for dividend growth investors seeking a consumer-facing stock.
HD PE Ratio data by YCharts
Trading with a price-to-earnings ratio of 24, Home Depot is slightly cheaper than the S&P 500's average of 26 -- making its 12 years of consecutive dividend increases an attractively priced option. With shares down roughly 12% to start the year, primarily on concerns around a new CEO transition and the possibility of pandemic-aided tailwinds fading away, Home Depot looks like a tremendous stock trading at a fair price.
3. Nike
Last we have one of the premier brands in the world, Nike (NKE -1.26%), and its unstoppably strong swoosh logo. Comparably not only has Nike ranked as the seventh strongest global brand, but lists it in 10th place on its Top Brands for Gen Z, indicating its immense staying power throughout generations.
Additionally, like Home Depot, Nike has been posting its own improving ROIC metrics.
NKE Return on Invested Capital (3y Median) data by YCharts
Despite the temporary drop shown above, which stemmed from a reimagined business during the start of the pandemic -- Nike's overall trend upward in the last decade is undeniable.
Fueled by its consumer direct acceleration strategy, the company fully embraces its newfound digital-sales prowess, capitalizing on its tremendous brand power and connecting with younger generations. Nike's North American digital sales grew by 40% year over year for the second quarter of 2022, which means that direct sales now account for 48% of the company's total North American revenue.
With 79 million actively engaged members, Nike looks to build upon the new digital chapter in its impressive history.
NKE PE Ratio data by YCharts
While the company trades at a high 38 times earnings, its annual revenue growth of 21% and nine consecutive years of growing its dividend (which yields 0.8%) present a beautiful blend of growth and shareholder returns. Following a 10% drop to start 2022, stemming from HSBC's analysts putting a downgrade to hold for the company's stock amid inventory shortages -- now may be the time to consider this dividend-growing behemoth, especially since the payout ratio is a measly 30%.
