The stock market is swooning these days. The Dow Jones Industrial Average (^DJI -0.11%) market index is down 13% year to date as investors weigh the long-term impact of the government's various measures to slow down surging inflation. Some of the bluest blue chip stocks on the market have posted double-digit negative returns this year. For example, Walt Disney (DIS 0.18%) is down 38%, Nike (NKE 0.66%) has lost 34%, and Cisco Systems (CSCO 0.06%) investors have taken a 31% haircut.
So the wisdom of the masses suggests that even the safest stocks on the market should be avoided right now. However, I see a massive buying opportunity here. Blue chips are known for their long-term survival skills, and this is not their first rodeo. Buying these stumbling giants today should set you up for market-beating returns in the long run.
You know the drill. Building wealth for the long haul means buying high-quality companies, investing more over time, and shrugging off short-term volatility. Following this healthy investing strategy, you'll find some of your favorite stocks on fire sale from time to time. It's a good idea to put some of your investing capital to work when you see these deals.
Every recession in recent history has been followed by a solid bull market, and the current downturn should follow a similar pattern. The best investments are the companies that can make it through a crash and come out swinging on the other side.
On that note, here's why Disney, Nike, and Cisco look like fantastic down-but-not-out investments today.
Down but not out
All three of these heavyweights were doing great a year ago. Shareholders of Disney and Nike saw their stocks reach all-time highs in 2021, and Cisco shares were priced at levels not seen since the dot-com bubble of 2000. I mean the bullish, high-flying bit of the bubble, not the terrifying pop.
But macroeconomic forces intervened. American inflation is running at 40-year highs, and the government's efforts to tamp those rates down again are adding pressure to many different economic systems. Many investors are backing down from the soaring growth stocks of yesteryear, taking the edge off their recent gains.
I'm talking about market trends rather than individual company results here, because the Dow members on my list didn't actually do much to deserve this massive correction.
- Disney exceeded Wall Street's expectations in the earnings reports of February and May. The strategic shift from cable and silver-screen media to digital streaming services is costly in this early growth phase but should pay enormous dividends in the long run. Even the theme parks are pulling their weight again.
- Nike is also crushing analyst targets in 2022. For example, the footwear and athletic apparel titan beat the Street's bottom-line estimates by 11% in this week's fourth-quarter report, showing strong execution in the face of serious headwinds. The company is battling worldwide supply chain issues, including COVID-based inventory reshuffling in the crucial Chinese market. Keeping year-over-year sales and earnings comparisons nearly flat under these circumstances is an impressive accomplishment.
- Cisco's story is more nuanced. The networking equipment veteran is consistently beating Wall Street's earnings targets, but its revenues have been wobbly and management's guidance targets aren't terribly impressive. Like Nike, Cisco is wrestling with worldwide supply chain issues, with the added wrinkle of heavy dependence on semiconductors. A lack of microchip manufacturing capacity adds game-changing pressure to businesses like Cisco's. However, we are still looking at a market leader in an industry with tremendous long-term prospects. Current prospects include 5G wireless networking, remote or hybrid work, and high-speed data center connectivity. After that, researchers are already kicking the tires of 6G wireless, even faster long-distance and data center networks, and a massive expansion of Internet of Things devices.
So these stocks have taken a beating despite solid results and inspiring long-term business prospects. The combination of strong earnings reports and falling share prices are driving valuation ratios much lower, resulting in some exciting value investment opportunities:
DIS normalized PE ratio. Data by YCharts.
Top-shelf business quality will shine through in the end
These blue chips have been through squalls of rough weather before and they will do it again. All three companies have powerful growth-boosting plans in their back pockets, just waiting for the economic headwinds to subside. Buying these high-quality companies while the stocks are found in Wall Street's bargain bin should help you build wealth in the long run, even if it could take a while before the rebound gains momentum.
And I'm not laser-focused on Cisco, Disney, and Nike here. These are just three fine examples of a broader trend. In general, you should look for proven blue chip stocks in challenging markets like this one. Just make sure that they still deserve their blue chip titles before you buy in. Remember: It takes flexibility to stay healthy and relevant in rapidly changing market conditions.
