Investing on Wall Street comes with its ups and downs. Last year undeniably veered toward the latter, with all three major U.S. indexes plummeting into a bear market.
But not all the indexes performed equally in 2022. Whereas the growth-driven Nasdaq Composite shed a third of its value, the 30-component Dow Jones Industrial Average (^DJI 0.62%) rallied to close the year lower by just 9%. Since the index is composed of historically profitable, multinational businesses, many are ideally suited to navigate a turbulent market.
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However, some Dow components stand out more than others. As we move into May, three Dow stocks have separated themselves from their peers as magnificent buys.
Visa
The first Dow stock that looks like a phenomenal buy in May is none other than payment-processing juggernaut Visa (V 0.59%).
The biggest threat to Visa at the moment is the expectation that the U.S. will dip into a recession at some point in the not-too-distant future. The March meeting minutes from the 12-member body that oversees monetary policy decisions noted that a "mild recession" is built into its outlook for later this year.
Most financial stocks are cyclical, which means they'll probably struggle if an economic downturn materializes. For Visa, a downturn would likely lead to lower consumer and enterprise spending.
But things look a lot different when investors take a few steps back. Though recessions are a normal, expected part of the economic cycle, the 12 that have occurred after World War II have lasted no longer than 18 months. Meanwhile, most bull markets and economic expansions last for years (note the plural). Visa is the type of company that allows patient investors to take advantage of the natural expansion of the domestic and global economy over time.
Visa also offers a rock-solid balance of predictable cash flow in developed markets and upsized organic opportunity in emerging markets. It accounted for close to 53% of credit card network purchase volume in the U.S. in 2021 among the four major payment processors. And since more than half of the world's transactions are still conducted in cash, Visa has plenty of opportunity to organically or acquisitively enter underbanked regions, such as the Middle East, Africa, and Southeastern Asia, in the years and decades to come.
Another reason investors can trust Visa as a long-term holding is its relatively conservative management team. This is a company that could easily enter the lending arena and be a success, if it chose to do so. However, Visa's management team has kept the company laser focused on facilitating payments.
While this might be a head-scratcher of a decision during bull markets, it makes for a genius move if a recession occurs: Instead of having to set aside cash to cover potential loan losses, Visa is free to move cash around as it sees fit. Not having to contend with loan losses or loan-loss reserves is a big reason Visa's profit margin remains consistently above 50%.
Walgreens Boots Alliance
For value and income seekers, healthcare stock Walgreens Boots Alliance (WBA -0.19%) represents a second magnificent stock to buy in May.
The lure of healthcare stocks is often the predictability they provide. We don't have the luxury of choosing when we become ill or what ailment(s) we develop, which means demand for prescription drugs, healthcare services, and devices remains relatively consistent in any economic environment.
Walgreens wasn't so lucky when the COVID-19 pandemic arrived. Since it relies heavily on its brick-and-mortar stores for revenue generation, all facets of its business were hurt by reduced foot traffic. This temporary pain the company dealt with during the pandemic is allowing investors to snag shares at such a low price.
For its part, Walgreens is years into a multipoint growth shift designed to improve customer loyalty, boost organic growth, and lift operating margins. Although it's managed to cut its annual operating expenses by more than $2 billion and it jettisoned its wholesale drug operations to AmerisourceBergen for $6.5 billion, these aren't the cost-cutting moves that investors should be most excited about.
The most exciting aspect of Walgreens Boots Alliance's growth strategy is its shift into a new vertical. Instead of simply adding new stores, the company partnered with, and became a majority investor in, VillageMD. The duo has opened 210 physician-staffed, full-service clinics colocated at Walgreens' stores, with a goal of opening 1,000 in over 30 U.S. markets by the end of 2027. Being physician staffed is a true differentiator that should drive repeat visits at the grassroots level.
The company's management team also fully understands how important convenience is to today's consumer. In the wake of the pandemic, the company has revamped its supply chain and spent aggressively on various initiatives to bolster its digital sales. Walgreens will never be a company that consumers predominantly buy goods from online. But direct-to-consumer sales are an easy way for Walgreens to lift its organic sales growth.
Value and income investors could do a lot worse than Walgreens Boots Alliance's forward price-to-earnings ratio of 7 or its dividend yield of 5.4%.
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Verizon Communications
A third Dow stock that represents a magnificent buy in May -- and is also bound to be adored by value and income seekers -- is telecom giant Verizon Communications (VZ 3.12%).
For more than a decade, historically low lending rates led mature telecom stocks like Verizon to take a back seat to high-growth tech stocks. But with interest rates rising at their fastest pace in four decades, the tables have turned. With access to cheap capital now gone and the U.S. economy potentially headed into a recession, telecom stocks like Verizon could regain their luster.
Predictability is a key reason to consider investing in telecom stocks. While double-digit annual sales growth is long gone for this industry, wireless access is viewed as a basic necessity. Historically low churn rates for Verizon and its peers pretty clearly show that consumers aren't willing to give up their wireless or broadband access, no matter how the U.S. economy performs.
The most front-and-center catalyst for Verizon should be the continued push to 5G download speeds. It's been around a decade since wireless companies last provided a sizable bump in download speeds to 4G LTE, which means the shift to 5G should create a sustained opportunity for device replacement. The prospect of a big uptick in data consumption is what should have Verizon shareholders excited. Data is the biggest margin driver for the company's wireless segment.
Interestingly, broadband has become something of a sleeping giant for telecom companies. Like wireless services, broadband's growth heyday occurred decades ago. But moving from 4G to 5G provides an incentive to lure households and businesses from competitors, as well as encourages high-margin bundling.
Verizon invested heavily in mid-band spectrum for its at-home 5G services. The 437,000 total broadband net additions recognized in the first quarter (the largest quarterly net addition in over a decade) appears to show that these hefty investments are paying off.
Verizon is never going to knock investors' socks off with its growth. But when the U.S. economic outlook is uncertain, it can be an extremely smart stock to put your money to work in, given its predictable cash flow. Sporting an inflation-crushing yield of 6.7% and a low price-to-earnings ratio of 8, Verizon stock is ripe for the picking.
