The Dow Jones Industrial Average is one of Wall Street's most heavily followed indexes. It's constructed from 30 of the most prominent companies traded on U.S. stock exchanges.
But being a large or important company doesn't mean the sailing is always smooth. Some of the stocks in the Dow Jones have struggled mightily in recent weeks. Companies like Walgreens Boots Alliance (WBA 0.28%), Walt Disney (DIS 0.97%), and Nike (NKE 0.60%) fell as much as 17% last month.
Have these three names hit temporary speed bumps, or have these Dow dogs seen their best days? I'll go through them individually and separate the contenders from the pretenders.
Contestant #1: Walgreen Boots Alliance
May decline: 12%
May's decline isn't news; the stock's slowly declined since peaking back in late 2018. Today, share prices are down 63% from their former high. So what gives? Walgreens is transitioning its business, and there are many moving parts. For many years, patients would visit their local pharmacy to fill prescriptions and pick up goods they might need.
That still holds mostly true today, but trends like e-commerce threaten Walgreens' store traffic. If people can fill their scripts online and ship them to their homes, patients might not visit the store, removing the opportunity to sell more profitable goods like food, cosmetics, etc. Walgreens has invested heavily in acquisitions to expand its stores' capabilities to include primary, specialty, and in-home services to patients.
Ideally, this would diversify the business from retail sales and prescription fills and protect store traffic. However, Walgreens' hefty spending has squashed profits in the near term and loaded the balance sheet with debt. The weaker fundamentals go a long way in explaining the stock's woes. Today, the stock trades at a price-to-earnings ratio (P/E) of just 7, but analysts expect low-single-digit earnings growth over the next several years. Walgreens has become a deep-value stock, hoping for a potential turnaround over the long term.
Verdict: Walgreens' stock is cheap and offers a 6% dividend yield. It's worth a speculative position, but keep your expectations low.
Contestant #2: Walt Disney
May decline: 14%
The entertainment giant has had a tough go for the past several years. The stock peaked on excitement over its streaming service Disney+, but its real problems started when it acquired a treasure trove of entertainment assets in a $71 billion deal with Fox. The deal loaded debt on Disney's books, which it could have paid off faster if it weren't for the pandemic the following year that shut down the company's lucrative parks businesses.
Today, Disney is still concentrating on growing its streaming audience more than making money. Disney+ had an impressive 158 billion subscribers as of April 1, but the streaming segment has lost $1.7 billion through six months of Disney's fiscal 2023 year. The combination of debt and streaming losses has soured Wall Street on shares, which are now down 54% from their highs -- a huge decline for a company as well-recognized as Disney.
But Disney will soon flip the profitability switch, so to speak. Management has emphasized that it wishes to turn streaming profitable by the end of its fiscal 2024 year, approximately next fall. This should help lift Disney's overall earnings growth; analysts believe the company's earnings-per-share (EPS) could more than double to $9 by the end of 2027, valuing the stock at a future P/E of just 10 today.
Verdict: Investors could reasonably expect the share price to double over the next four to five years using a P/E of 20. Consider buying Disney today for the long term.
Contestant #3: Nike
May decline: 18%
Apparel giant Nike is one of the best-performing stocks ever, so it's surprising to see shares decline so much in one month. However, here we are. But take a closer look and some cracks appear in the swoosh's armor. First, Nike is struggling with some margin pressure stemming from various problems. The company has had to cut prices to liquidate excess inventory, while grappling with higher costs from things like freight. Gross profit margin fell 330 basis points year-over-year in the quarter ending Feb. 28.
Additionally, the stock has been priced to a valuation that demands perfection. Shares traded at a P/E of nearly 37 entering the month of May, about twice as steep as the S&P 500 trades. However, analysts expect Nike to grow earnings by 11% annually over the next three to five years, just modestly above the broader market's historical growth rate. In other words, it was given a valuation the company's fundamentals couldn't justify.
So where do we go from here? Shares now trade at 30 times earnings after the recent slide. The long-term story is still intact -- as in five or 10 years from now (or longer). Nike is one of the world's most recognized brands, and sports are a cultural staple worldwide. Every business has ups and downs, and Nike isn't immune to that.
Verdict: The valuation is still a bit steep. Consider waiting for a P/E of 25 or less (another 15% lower), which would more closely resemble its growth outlook compared to the broader market.
