For the past 127 years, the iconic Dow Jones Industrial Average (^DJI 0.40%) has been one of Wall Street's most-followed indexes, and a barometer for the health of the stock market.
Although the Dow Jones is far from perfect -- it's a share price-weighted index, rather than market cap-weighted -- its 30 components are generally profitable on a recurring basis, time-tested in the sense that they've navigated their fair share of recessions, and multinational. In other words, these are businesses investors don't have to worry about when they go to sleep at night.
Image source: Getty Images.
However, not all of the Dow's 30 components are created equally. Some offer substantially better value than others. In particular, three Dow stocks are stand-out buys for the month of July -- and likely well beyond.
Johnson & Johnson
There's probably not a Dow component I've pounded the table on more in recent memory than healthcare stock Johnson & Johnson (JNJ -0.46%), which is commonly referred to as J&J.
The most front-and-center headwind for J&J is the overhang of litigation tied to its now-discontinued talcum-based baby powder, which was alleged to have caused cancer for some users. Initially, Johnson & Johnson spun off its subsidiary, LTL Management, and filed for Chapter 11 bankruptcy, with the hope that this spinoff-and-file strategy with LTL would protect it from a potentially large financial liability. This strategy was eventually denied by a federal appeals court earlier this year. With approximately 40,000 lawsuits to contend with, there's a degree of uncertainty that's rarely been observed with a long-term outperformer like J&J.
However, the talcum-based lawsuits facing the company aren't a game changer. In fact, J&J proposed an $8.9 billion settlement in April. Whatever figure ultimately puts these lawsuits in the rearview mirror for Johnson & Johnson is a number that it'll be able to afford with ease.
Something investors may not know about Johnson & Johnson is that it's one of only two publicly traded companies to be given the coveted AAA credit rating from Standard & Poor's (S&P), a division of S&P Global. This rating, which is one notch higher than the credit rating bestowed on the U.S. government, demonstrates S&P's complete faith that J&J can service and repay its outstanding debts.
What makes J&J such a special company is its operating diversity. For well over a decade, it's shifted more of its total sales to faster-growing, higher-margin pharmaceuticals. To counter the potential of brand-name drug patent cliffs in the future, J&J has aggressively reinvested in its pipeline and forged collaborations. It also has an industry-leading medical technologies segment that should see sales increase over time as access to medical care improves and the global population ages.
Furthermore, since demand for healthcare services, prescription drugs, and medical devices is constant and not cyclical, investors can count on highly predictable cash flow from J&J year after year.
With a forward price-to-earnings (P/E) ratio of around 14, Johnson & Johnson is cheaper than it's been in at least a decade.
Intel
A second Dow stock that's a stand-out buy for July, and well beyond, is semiconductor behemoth Intel (INTC -9.20%).
Investors don't have to dig too deep to uncover why Intel's shares have lost more than half of their value since April 2021. In the March-ended quarter, Intel reported its largest-ever operating loss, which came on the heels of a 38% drop in Client Computing Group sales and a 39% tumble in Data Center and AI (artificial intelligence) segment revenue. To boot, chief rival Advanced Micro Devices has been chipping away (the pun had to be made) at Intel's central processing unit (CPU) share in personal computers (PCs) and data centers.
While these are real concerns that should be acknowledged by investors, the headwinds Intel is contending with appear largely overblown.
For example, while AMD has, indeed, been taking CPU share from Intel, the latter still holds an overwhelming percentage of CPU share in data centers, mobile, and PCs. AMD claiming additional share hasn't impacted Intel's ability to generate copious amounts of cash flow, which is allowing the company to reinvest in higher-growth initiatives.
One of the more exciting long-term opportunities for Intel is its foundry services. Last year, the company broke ground on two chip fab plants in Ohio at a total cost of $20 billion. Last month, Intel and Germany forged a deal that'll see the chipmaker build a $33 billion chip fab plant in Magdeburg. Best of all, a third of the cost will be covered by the German government. Further, Intel is in the process of acquiring Tower Semiconductor. Collectively, it puts Intel on track to become the world's No. 2 foundry by the end of the decade.
Don't overlook Intel's AI ambitions, either. The introduction of its Falcon Shores AI-driven graphics processing unit by 2025 should allow it to capture share in enterprise data centers.
Additionally, it's still the overwhelming majority shareholder in advanced driving assistance systems (ADAS) company Mobileye (MBLY -5.50%), which it spun off in October 2022. Mobileye offers sustained double-digit sales growth with new vehicles increasingly incorporating ADAS and autonomous driving solutions.
It's been exceptionally rare for Intel to trade below 200% of its book value (i.e., two times its book value) over the past 35 years. Investors can pick up shares of this cash-flow machine right now for just 135% of its book value.
Image source: Walt Disney.
Walt Disney
The third Dow Jones Industrial Average stock that's a stand-out buy for July and beyond is the famed "House of Mouse," Walt Disney (DIS -0.04%).
Investors are likely far from amused with Disney shares sitting near an eight-year low. The culprits for the poor performance of Walt Disney stock include three years of multichannel (i.e., theme parks and theaters) operating disruptions caused by COVID-19, weaker advertising revenue in response to the growing likelihood a U.S. recession, and wider-than-anticipated operating losses from the company's streaming division.
However, Walt Disney's headwinds aren't altering its growth strategy. In other words, it means this short-term pain represents an opportunity for long-term investors.
To begin with, Disney's COVID-19 challenges are firmly being placed into the back seat. While it could take China's residents some time to build up immunity to the virus that causes COVID-19, a reopened China is good news for the company's theme parks and media arm.
The strength of Walt Disney's brand is another reason investors can confidently put their money to work in this company. There isn't another entertainment company that has the library of characters and stories that Disney possesses. The emotional engagement and cross-generational connections that Disney's stories evoke is an invaluable tool the company uses to attract people to its brand, as well as increase its prices above and beyond the prevailing rate of inflation.
The ability to raise prices is one of the most powerful tools Disney can use to get its streaming segment to recurring profitability. The company has already raised prices on its subscribers, and recently introduced a less-costly ad-supported tier. What's interesting is that Disney lost only 6.4 million Disney+ subscribers (164.2 million to 157.8 million) in the six months after enacting sweeping price hikes. This demonstrates the power and stickiness of the Disney brand.
Investors should also be excited about Bob Iger being back in the saddle as CEO. Iger has overseen a number of earnings-accretive acquisitions while at the helm, including Pixar, Marvel Entertainment, and Lucasfilm.
With Wall Street's consensus calling for 22% annualized earnings growth for Walt Disney over the next five years, shares of the company look like a steal at 17 times forward-year earnings.
