It's been a rough past few months for investors. Not even the market's best-known blue chips have been able to stand up to the marketwide headwind. The Dow Jones Industrial Average (^DJI 0.06%) is down to the tune of 14% for the year, and it seems like it could move even lower before all is said and done.
There are some Dow components, however, that have undeservedly been swept out with the marketwide bearish tide. Here's a closer look at three Dow stocks that could readily bounce back during the latter half of the year once investors realize their mistake.
1. Caterpillar
The pessimism plaguing Caterpillar (CAT -0.11%) since this time last year makes enough sense. Between lingering supply chain challenges, sky-high commodity prices, and the prospect of both pushing the world into a recession, the stock has understandably fallen more than 20% from last June's peak.
This degree of doubt, however, may be overestimating what's actually going on with the company.
Sure, the global economy is wobbly right now; inflation hasn't been nearly as "transitory" as first hoped. But we may be nearer the end of the headwind than the start, and Caterpillar could be better equipped to snap out of it than most people appreciate. Its first-quarter revenue was up 14% year over year despite plenty of challenges during that three-month stretch, and analysts still expect its post-pandemic rebound to translate into full-year sales growth of more than 12%. And although the top-line growth is apt to cool to only 8% next year, its current earnings growth rate is expected to remain around its current pace of 16%.
Largely overlooked is how resilient this company may prove to be even during a recession. As CEO Jim Umpleby explained at a recent investor conference:
We haven't seen signs of slowdown in our markets. The vast majority of the markets we serve are still quite strong and our challenge at the moment, quite frankly, is supply chain, our ability to supply enough equipment to meet all the demand that's out there. We haven't seen that slowdown.
He's talking about mining and drilling, mostly. What's a headache for most organizations -- sky-high prices -- is ultimately a boon for this huge swath of Caterpillar's customers.
Bonus: Caterpillar is easily funding its dividend payment. Thanks to its recent weakness, newcomers are stepping in to the stock while the yield is right around 2.4%, based on a dividend that's been raised for 28 consecutive years now. This income could round off any rough edges of volatility that may still be in the near-term cards for the stock.
2. Apple
Apple (AAPL -0.57%) may not be the dividend payer Caterpillar is. It's also not a must-have growth monster. What Apple is, however, is a slow-moving tank that rolls over rivals like they're not even there. In only five quarters in the past 12 years has the company's top line fell on a year-over-year basis, and each of those top-line ebbs was in comparison to a sales surge linked to the launch of a new iPhone. Long-term earnings growth has been similarly consistent, even if a little more erratic from one quarter to the next.
It doesn't take a rocket scientist to figure out why. Apple is the most recognized brand in the world, according to IG Markets, while Kantar categorizes it as the world's second-most "valuable" brand. Both ultimately point to the same thing: The company makes a great product its customers are fiercely loyal to. And, it fosters that loyalty with an app store that lets consumers get the most out of their devices.
Although fewer than one-third of the world's smartphones are iPhones, SensorTower estimates that Apple's digital content business is nearly twice as big as rival Alphabet's -- the company behind the much more popular Android operating system. A popular app store, of course, also drives sales of iPhones to new users.
This is no small matter. While Apple's services arm only makes up 18% of its revenue, these digital services generate roughly 30% of its gross margin. That's because iPhone users not only spend more on apps and digital content than users of other mobile operating systems, but much of this spending is on subscriptions. That's why the company's top and bottom lines grow so predictably, even in seemingly tough times.
The market seems to have forgotten this dynamic, given the stock's 23% slide just since March's high. But investors will remember it when Apple starts posting results that reprove this reliability.
3. IBM
Finally, add IBM (IBM -0.89%) to your list of Dow stocks set to soar in the latter half of 2022.
It's a name many investors had not only given up on, but forgotten about. Once a titan within the technology sector, the company colloquially called Big Blue just didn't adapt quickly enough to the advent of cloud computing, mobility, and artificial intelligence.
Today's IBM, however, isn't the same IBM that missed the boat more than a decade ago, when revenue began a 10-year contraction streak. Ditto for earnings. Today's IBM has mostly shed its low-growth (or no-growth) legacy businesses like managed infrastructure services, and is now hyper-focused on hybrid cloud computing -- a market that CEO Arvind Krishna indicates will be worth $1 trillion in the foreseeable future.
It's already winning its fair share of this business too. For its first fiscal quarter ending in March, revenue growth of 11% (on a constant currency basis) was led by its hybrid cloud arm despite a rocky start to the year for most other companies. The analyst community expects sales growth to cool to 6% for the full year, and that pace will probably cool to only 3% next year. But it's still growth from a company that hasn't seen much of it in a long, long time, and perhaps more than that, it's extremely profitable growth.
New technologies like hybrid cloud have a somewhat non-optional future -- if an organization wants to be competitive, it has to embrace this tech regardless of the cost. To this end, for every dollar's worth of hardware it sells, IBM also generates between $3 and $5 worth software sales, and between $6 and $8 worth of services revenue. Given this, IBM's free cash flow guidance of between $10 billion and $10.5 billion for 2022 may seem unrealistically optimistic to some, but makes perfect sense to those who understand that once software is written, the cost to distribute it is practically nil.
Investors are starting to understand this, bidding shares up since November against the market tide. There's plenty of room for shares of the new-and-improved IBM to keep rallying, though.
The dividend yield of 4.6% of course only bolsters the bullish case.
