The Dow Jones Industrial Average (^DJI 0.56%) may have logged a 2.5% gain last month, but that doesn't mean all 30 of its components followed suit. A handful of the index's constituents actually lost ground in April. As veteran investors can attest, of course, the time to step into good long-term stocks is after short-term setbacks.
With that as the backdrop, here's a closer look at the Dow's biggest losers from April, and some thoughts regarding their attractiveness in the wake of their sell-offs.
Spoiler alert: Only one of them is a must-have for most investors at this point in time.
The Dow's worst of the worst
Last month's biggest losers among the Dow's components were Caterpillar (CAT -0.55%), Intel (INTC -2.40%), and Cisco Systems (CSCO 0.44%), which fell 4.4%, 4.9%, and 9.6%, respectively.
Each decline has its own unique story.
Take Caterpillar as an example. The bulk of its dip materialized in the early part of April, largely due to worries that a recession would take a toll on the heavy equipment business. The stock attempted to bounce back in the middle of the month. The impressive first-quarter earnings report released in the latter part of April (Caterpillar beat revenue and earnings estimates in a big way), however, wasn't enough to overcome lingering concerns about an economic slowdown. Caterpillar CEO Jim Umpleby even believes the company's recent outsize growth in pricing power is topping out, setting the stage for contracting profit margin beginning in the current quarter. It's not what investors wanted to hear.
Intel shares started April on a bearish note due to the same worries about economic weakness. But the stock ended the month at least trying to rekindle March's rally. The effort simply struggled to gain traction.
Blame the mixed message delivered by Q1's earnings. Although its record-breaking first-quarter loss of $0.04 per share is better than the $0.15-per-share loss analysts were calling for and CEO Pat Gelsinger sees "green shoots" that will translate into better margins in the second half of the year, investors are struggling to look past the 36% year-over-year plunge in revenue.
As for Cisco, it is also a victim of broader economic worries. Unlike Caterpillar and Intel, though, earnings didn't upend the stock later in the month. It's simply out of favor, being in the worst possible sector (technology) at the worst possible time.
To buy, or not to buy?
The time to buy quality stocks, of course, is when they're discounted -- and the deeper the discount, the better. The question is, are any or all of these companies a quality pick at this time?
The answer: It largely depends on your time frame.
Of the three Dow names in question, Intel can be taken off the table as a prospective buy until further notice. Although it's been the centerpiece of the computer processor industry for years, it's also struggling to keep rivals like Nvidia and even Advanced Micro Devices in check. Never even mind its longstanding manufacturing challenges it just can't quite push past. Truly great stocks represent companies at the top of their game. That's not Intel right now, nor will it be at any point in the foreseeable future.
Not so for Caterpillar. Although we should take Umpleby's pricing power warning to heart, bear in mind it's a cyclical headwind. Caterpillar is the top name in the heavy equipment arena. It just so happens that the arena itself is currently hampered by uncertainty. That will change eventually. The company will be a more compelling prospect then.
As for Cisco, although the market environment hasn't been kind to tech stocks lately, investors have proverbially thrown the baby out with the bathwater. Cisco is doing just fine despite economic uncertainty. Analysts forecast revenue growth of nearly 10% in 2023, followed by another 4% increase next year. Per-share profits are projected to rise accordingly. It's not tremendous growth, but with the stock trading at only about 10 times next year's expected earnings, this tepid pace is already reflected in the share price.
The kicker: Cisco stock's current price near $46 is more than 20% below the consensus target of $56.59, making this one of the Dow's most undervalued constituents.
The real takeaway here, however, is the lesson quietly buried in the discussion. All of these buy-and-sell decisions are company-specific and made in light of the economic backdrop. The least important factor in these three instances (ironically) is last month's poor performance. Bargains are great, but you shouldn't be afraid to pay up for quality, either. Likewise, a cheaper stock isn't inherently a better pick because of a pullback. Trade accordingly, with the bigger picture in mind.
