2023 has thus far been a winning year for stocks, despite fears of a recession overshadowing the market over much of the first half.
While the economy seemed headed for a recession at the start of the year, inflation has moderated as unemployment has remained low, and a boom in artificial intelligence has sent valuations higher across the tech sector.
As a result, all three major indexes are up so far this year, but the Dow Jones Industrial Average is trailing the other two in part due to the outperformance of the tech sector. The chart below tells the tale.
Buying market laggards in an early bull market can be a winning strategy, as a rising tide tends to lift all boats. With that in mind, let's take a look at the three worst-performing stocks on the Dow this year to see if any are worth buying.
1. Walgreens Boots Alliance (down 22.1% YTD)
Walgreens Boots Alliance (WBA 0.57%) has been underperforming the market for years as the company's plan to transform itself into a more comprehensive healthcare company has not delivered the desired results. The stock price is now the lowest it's been in more than 10 years.
More recently, the stock has struggled as it faces difficult comparisons with results from a year ago when COVID-19 vaccinations and tests were more common.
This year, the company was forced to slash its full-year earnings guidance from an initial target of $4.45-$4.65 per share to $4.00-$4.05 due to "challenging consumer and macroeconomic conditions and lower COVID-19 vaccine and testing volumes."
Rival CVS also cut its EPS guidance for the year and has significantly lagged the market, indicating that the challenges in the pharmacy industry go beyond Walgreens.
The company continues to diversify away from its core pharmacy business, acquiring CareCentrix, a provider of home health and other services, for $380 million. Its VillageMD primary care subsidiary also acquired Summit Health, which operates urgent care clinic CityMD, for $9 billion. However, investors seem unconvinced by that strategy.
Walgreens' dividend yield is now up to 6.5%, but given its track record and current challenges, the stock is best avoided until the underlying business improves.
2. Verizon Communications (down 20.2%)
2023 has also been a rough year for the telecom industry as both Verizon (VZ 1.17%) and rival AT&T have badly trailed the market. Modest growth prospects, rising interest rates that have made bonds more attractive, and macroeconomic headwinds that have dissuaded consumers from spending more on phone plans have led to increased price competition among the big three telecoms, which also includes T-Mobile.
As the chart below shows, most of Verizon's decline this year has actually come this month.
The main reason for the recent decline is an investigation by The Wall Street Journal showing that Verizon and AT&T could be responsible for lead contamination from lead-sheathed cables from decades ago that they have not cleaned up.
The news sparked several analyst downgrades on Verizon stock and could lead to lawsuits from local communities as well as the EPA, which is reportedly investigating the situation, adding liability risk to a company already struggling with a large debt burden.
Verizon's quarterly results have mostly been in line with estimates, but the company still expects earnings per share to fall this year due in part to declining wireline and equipment revenue.
Like Walgreens, Verizon offers a high dividend yield, currently at 8.3%. The company is solidly profitable, and that yield is appealing. The risk from lead contamination is difficult to quantify, but the stock should eventually find a bottom, making this a potential buying opportunity for dividend investors who can tolerate some losses in the near term.
3. 3M (down 15.2%)
Like some other industrial stocks, 3M (MMM 0.46%) has struggled with a slowdown in demand, and the company was even forced into doing layoffs, saying in April that it would cut 6,000 jobs on top of 2,500 positions it eliminated in January.
3M's quarterly results this year have also been disappointing. Adjusted earnings per share declined in its fourth quarter from $2.45 to $2.28. Organic sales grew just 0.4% and revenue declined 6% due primarily to currency headwinds.
In the first quarter, those headwinds increased with sales down 9% and organic sales falling 4.9%. Adjusted earnings per share declined from $2.63 to $1.97.
The company announced several cost-cutting measures in addition to layoffs, including streamlining its supply chain and go-to-market models.
In June, the stock bounced on news that 3M settled a lawsuit over PFAS, or so-called "forever chemicals," agreeing to pay $10.5 billion-$12.5 billion, a range media reports had previously indicated. The agreement put to rest an issue that had weighed on the company and the stock, as investors dislike liability risk. Still, 3M faces another major lawsuit over military-grade earplugs that failed to protect veterans.
3M is set to spin off its healthcare division later this year or early next year, and the cost cuts should help boost its margins. If the company can return to organic sales growth, the stock could pose a comeback from here.
