The Dow Jones Industrial Average consists of 30 companies that are among the largest and most influential in the world. However, some companies within the index have a better future than others.
In my opinion, the top three stocks to buy in the index right now are Microsoft (MSFT 1.65%), Salesforce (CRM 1.05%), and American Express (AXP 2.56%). Read on to discover why this trio's future is brighter than other components.
1. Microsoft
Microsoft is more than the maker of Office products you likely use on your computer. It has a gaming segment, advertising, and a cloud computing business, making it one of the biggest tech conglomerates in the world. Thanks to weak PC demand, revenue for its fiscal 2023 second quarter (ended Dec. 31, 2022) only rose 2%. This decrease brought down earnings as well, with the company's earnings per share (EPS) falling 11% in Q2.
However, the PC weakness is temporary and will eventually grow once consumers are ready to upgrade their devices. In the meantime, the primary reason to invest in Microsoft is its cloud business.
The staple of this division is Azure, which grew revenue at a 31% pace in Q4. According to Synergy Research Group, Azure is in second place in terms of market share behind Amazon Web Services (AWS), controlling an estimated 21% of the market. With the cloud computing industry expected to reach $1.6 trillion by 2030, per Precedence Research, this division will likely lead Microsoft throughout the next decade.
Even though the stock trades at an expensive 30 times earnings, its price-to-sales ratio isn't as expensive as its earnings multiple might have you believe.
MSFT PE Ratio data by YCharts
Microsoft is a technological leader, and its prowess will help power the stock for the next few years. With the shares trading at a reasonable multiple, investors should further investigate Microsoft as a potential investment.
2. Salesforce
Salesforce's software has become the industry standard in the customer relationship management industry (thus its ticker: CRM). Its products help acquire new customers, serve existing ones, and increase sales. Salesforce has long been heralded as one of the chief software-as-a-service (SaaS) companies but has been plagued by just one thing: unprofitability.
Fortunately, Salesforce seems to have found religion and is improving its bottom line. In Q4 of its fiscal 2023 (ended Jan. 31), Salesforce delivered a generally accepted accounting principles (GAAP) operating margin of 4.3%. While this isn't world class by any means, it's better than being unprofitable.
Salesforce is also taking action to improve this figure, announcing a 10% reduction in its sales and marketing teams in January. For fiscal 2024, Salesforce expects its operating margin to improve to 10.8%, demonstrating the power of its cost reduction strategy.
Despite Salesforce's improvements and projected 10% revenue growth, the stock trades at a historically low price-to-sales valuation.
CRM PS Ratio data by YCharts
With Salesforce becoming more profitable, growing at a market-average pace, and trading at a historically low valuation, the stock looks like a strong candidate to continue having an excellent 2023 and a bright future.
3. American Express
American Express is a credit card company but also has banking aspects, since it manages the risk of its credit loans. It's also a favorite of Warren Buffett's Berkshire Hathaway as 7.6% of Berkshire's portfolio is invested in American Express. As interest rates rise, the possibility of consumers defaulting on credit cards also increases, potentially making American Express a risky investment here.
However, American Express thinks 2023 will be an excellent year for the business. Management believes it can grow its EPS by 16% this year, which brings its forward valuation to 14.6 times earnings. This is relatively low compared to the stock's historical valuation levels.
AXP PE Ratio (Forward) data by YCharts
The future is also bright for American Express as its millennial and Gen-Z cohort now makes up 30% of total U.S. business, up from 26% last year.
With the company backed by one of the world's best investors, a cheap valuation, and a strong growth projection, American Express is poised for greater upside.
