Some investors like to pick through the trash to find hidden gems. Looking at the worst-performing stocks in the Dow Jones Industrial Average is one way to do just that. But it won't always turn up good opportunities. In July, Verizon (VZ 1.17%), Merck (MRK 0.37%), and Honeywell (HON 0.22%) were index laggards. Here's a quick look at each to see if they are worth your time and energy.
1. Verizon could see things get worse
Verizon is a telecom giant, with a huge cellular phone business and a notable legacy wired operation. The cellular business is very competitive, with service quality a key factor. That requires near constant spending to make sure the Verizon network is on par, if not better, than the competition. Right now there's a shift to 5G taking place. The problem for Verizon is that keeping up with all this spending is expensive, and the company is more leveraged than its closest rivals. It is fair for investors to worry about its balance sheet.
That, however, is not all. Grabbing headlines in July is the fact that Verizon and some of its peers may have material liabilities related to lead used in the legacy wired operations. That news hit in July and investors clearly decided the risks weren't worth the rewards with the stock, now that there was another potentially expensive issue to address. Most investors will probably be better off erring on the side of caution.
2. Merck has some wins and losses
Merck is a large pharmaceutical company. Its business is highly dependent on its slate of current drug offerings and the pipeline of products it has in development. For most investors it will likely be difficult to track both of these, noting that a full review of either will also require examining Merck's competition. There's a lot to keep track of, and medical issues are complex. Buying a healthcare mutual fund or ETF would probably be a better option than a singular drug company unless you are particularly interested in the drug sector.
That said, Merck has had some wins and losses recently. For example, a cancer drug that is expected to be a major seller produced positive results in July. But the company also withdrew a COVID-19 vaccine from consideration in Europe as June drew to a close. Also in late June, the company was accused of downplaying the risks of a drug. And that's just a small sample of the news flow here that investors need to digest.
As August got underway, meanwhile, Merck reported earnings that beat on the top and bottom lines. In fact, despite the weak showing in July, Merck's stock is up near 10-year highs, and the dividend yield is near 10-year lows. If you are looking for an out-of-favor stock, Merck will probably be a bad option.
3. Honeywell and its economically sensitive industry
Industrial giant Honeywell was the third-worst-performing Dow stock in July. It reported earnings during the month, beating Wall Street projections on the bottom line and coming in roughly as expected on the top line. The company even raised its full-year guidance. Normally, investors would expect that type of news to lead to a rising stock price. The negative view here is probably a mix of two factors.
First, as an industrial stock, Honeywell's business tends to be cyclical. One of the ongoing concerns on Wall Street today is whether or not the Federal Reserve's interest rate hikes will lead to an economic downturn. If there is a recession, Honeywell's business performance will likely suffer. Meanwhile, Honeywell's stock appears to be trading at an elevated valuation if you look at key valuation metrics like price-to-sales, price-to-cash flow, and price-to-book value, which are all above their five-year averages. Price-to-earnings is below its five-year average, but the trend across all of the metrics here appears to suggest a lofty valuation. So, despite Honeywell's strong earnings performance, investors may be stepping back out of concerns about valuation and recession risk. You are likely to find better value opportunities in the industrial sector.
Nothing much to be excited about
Warren Buffett has joked that you don't need to swing at a pitch on Wall Street because there's nobody calling balls and strikes. His meaning is that you should only buy a stock when you have a material conviction. Right now Verizon, Merck, and Honeywell don't seem like high-conviction stocks.
