Should You Buy the Dow Jones' 3 Worst Performing 2022 Stocks?

If you like to buy blue chip stocks while they're on sale, there are plenty to pick from right now. The Dow Jones Industrial Average (^DJI 0.69%) is down to the tune of 15% year to date, and fully half of its 30 components are down by even more.

It's this group of laggards, of course, that pique the most interest among bargain hunters. But are the worst performers of 2022's first half the best deals now, or should their share price weakness be read as a warning about these companies' underlying businesses?

The usual advice is, don't buy a stock just because it has tumbled by an unusual amount ... even if it's a blue chip. In this particular instance, however, you may actually want to start nibbling on these oversold equities.

The Dogs of the Dow, first half of 2022 edition

If you were wondering, the Dow's biggest losers thus far this year are Walt Disney (DIS 1.54%), Nike (NKE -0.18%), and Home Depot (HD 0.86%), down 38%, 37%, and 33%, respectively. And it's not tough to figure out why each of them slumped.

While Disney is rebounding from the initial impact of the pandemic on many of its business units, the growth of its streaming platforms is slowing dramatically. The media and entertainment giant has also been criticized and even boycotted for its stances on certain sociopolitical matters.

Nike remains the king of athletic apparel. However, it's also been impacted by the economic impact of Russia's invasion of Ukraine, as well as dealing with persistent global supply chain woes. Analysts had been expecting its revenue to slump in its fiscal fourth quarter, which ended May 31, and anticipated profits of only $0.81 per share, compared to $0.93 per share in the prior-year period. Nike did top that outlook: It reported operating income of $0.90 per share for Q4 on Monday. But both its sales and its earnings still fell.

Home Depot, of course, is bumping into a housing market headwind. The number of new home construction starts fell to a 13-month low in May, and the annualized number of new permits to begin home construction fell by 7%. The National Association of Home Builders/Wells Fargo Housing Market sentiment index also reached a two-year low in June after falling for six consecutive months. Home Depot doesn't exclusively serve homebuilders. This construction slowdown suggests waning consumer interest in any home improvements though, and in the meantime, somewhere between 40% and 50% of the retailer's business is driven by professional contractors. Any measurable weakness on the construction front is a concern for the company, and a worry for shareholders.

Given all those issues, the underperformances of these Dow stocks make some sense.

Before dismissing any of these names as potential purchases though, it might be worth taking a step back and looking at the bigger picture. Their recent stock price weakness may be less about these companies specifically and more about the market environment. If that's the case, perhaps investing in these beaten-down Dow components would actually make sense.

Investing is a social science too

Although it's smart to buy good companies while their stock prices are low, a low price alone doesn't inherently make a stock "good." Indeed, there usually aren't even degrees to the idea. A mediocre company doesn't become a more compelling investment just because its stock has been pummeled. Investors should generally expect to pay up for quality.

The current conditions on Wall Street, however, appear to be creating some exceptions to that rule.

It's not the sort of thing that's easy to put your finger on. As most veteran investors can attest, the market can be moody. In the latter half of 2020 and for the better part of 2021, most stocks could do no wrong -- at least, not for long. As such, simply buying on the dip kept being a successful strategy. The mood shifted around the turn of the year. Investors began seeing the very same glasses as being half-empty rather than half-full. In the space of a few weeks, News that wasn't viewed as particularly worrisome suddenly became threatening to businesses' market values.

That's not to suggest that recent developments haven't taken a legitimate toll on the aforementioned Dow names. A housing market slowdown will be a headwind for Home Depot. Nike's supply chain problems are taking a toll on its business.

The punishment, though, does not fit the crime. Each of these three blue chips has fallen by more than 30% this year, and Disney is off by more than 40% over the course of the past 12 months. And the largest parts of these sell-offs were arguably rooted in overblown fears of what might happen.

Sometimes -- often for unclear reasons -- investors as a group pick on certain stocks more than they should. Blame the market environment. Fear is contagious. Fear also draws crowds to media outlets, many of which rely on this traffic to generate the ad revenue that pays their bills.

The good news is, investors tend to figure out their fears have reached irrational levels sooner than later. Once that happens, look for the market's most oversold stocks of its healthiest companies to start climbing again.

In this vein, consider this: Even against the backdrop of the lackluster fiscal Q4 2022 it recently completed, in its fiscal 2023, Nike is still expected to pump up its top line by 11%, and grow its earnings from $3.75 per share to $4.45 per share.

This is more than a simple stock hunt

None of this should be viewed as an assertion that Home Depot, Disney, and Nike have already hit their cyclical lows and can only climb from here. They may still decline. Summer is a slow time for stocks anyway, and years that start on a bearish foot tend to remain on that bearish foot through September.

Rather, this is simply to point out that investing isn't always a matter of merely picking the right stocks. The most skilled investors regularly take the market's temperature and ask what's really driving a stock's price movements. Sometimes it has little to do with the company. Sometimes, it's the broader market environment pushing shares around. And sometimes, that translates into opportunities for the investors who pay attention to those sorts of nuances.