What's the first rule of investing you learned? For most of us, it's probably "Buy low and sell high." That's certainly the right start to your journey as an investor too, since every other lesson builds on that simple one.
The premise, however, is potentially short-sighted. It implies you should only buy stocks at a low point following a pullback. The lesson can be so well-learned, in fact, that stepping in during or after a rally can feel downright uncomfortable. This conflicts with one of the lessons you'll learn later in your journey... that is, take every prospective stock pick on a case-by-case basis. Sometimes there's good reason to buy a stock that's already rallying.
With that as the backdrop, here's a closer look at the Dow Jones Industrial Average's (^DJI 0.40%) three best-performing stocks last month. More gains may be in store.
Or, maybe not. Again, every stock pick should be made on a case-by-case basis.
What went right
Last month's biggest winners from the Dow are Cisco Systems (CSCO -0.50%), Amgen (AMGN 0.22%), and Caterpillar (CAT 1.59%), which gained 10.2%, 9.5%, and 6%, respectively. For perspective, the Dow Jones Industrial Average itself fell to the tune of 2.1% in August.
While Cisco posted impressive fiscal fourth-quarter numbers and a healthy outlook early in the month, as you can see, Cisco stock's bullish progress in August was slow and steady. It was advancing prior to the Aug. 16 release of its Q4 results, and continued to march forward at that same pace afterwards despite a small slip-up right around that time. This action suggests that (1) investors more or less knew what to expect, and (2) they liked what they were expecting.
And well they should. Cisco's Q4 revenue of $15.2 billion was up 16% year over year, topping estimates of a little less than $15.1 billion. Per-share earnings of $1.14 were 37% better than the year-ago comparison, and also beat the consensus of $1.06 per share. Although its revenue guidance for the new year now underway fell a bit short of forecasts, investors are cheering the fact that Cisco is now capitalizing on the booming artificial intelligence (AI) market.
Amgen stock's gains were less evenly paced, with all of them coming early in the month. In fact, shares of the drugmaker peaked mid-August and spent the latter half of the month inching lower.
Even so, the catalyst was a singular one. Amgen beat its second-quarter top-line estimates of just under $6.7 billion with sales of nearly $7 billion, up 6% from revenue reported for Q2 of last year. Earnings were up similarly. Given the quarter's robust results, the company also raised its full-year guidance. Amgen is now calling for 2023 sales of somewhere between $26.6 billion and $27.4 billion, versus its previous guidance range of $26 billion to $27.2 billion. Its earnings outlook was raised as well.
Perhaps the bigger driver of the stock's bullishness last month, however, was Amgen CEO Robert Bradway's optimism that the company's intended takeover of Horizon Therapeutics would be completed by December. At the time, the U.S. Federal Trade Commission (FTC) was working to block the merger.
As it turns out, Bradway was right. Just last week, the FTC dropped its efforts to prevent the pairing of the two companies. Shares didn't move much on the news, simply because most investors had already priced it in.
As for Caterpillar, chalk its gains up to a post-earnings surge early in the month as well. The construction equipment company's second-quarter sales of $17.3 billion were 22% better than the Q2 top line from 2022, topping estimates of $16.5 billion. Earnings were equally impressive. More than that, though, investors are celebrating the underlying suggestion that the global economy may be on a firmer footing than it seems on the surface. If this is indeed the case, Caterpillar's strong Q2 isn't a mere one-off.
Too late to buy these hot Dow stocks?
But are any of these stocks worth buying now following August's big gains?
Again, every potential pick should be taken on a case-by-case basis. In all three of these cases, though, yes, these tickers are still worth buying regardless of what happened with them last month.
Don't misunderstand. There are instances where a great stock is an even better buy specifically because it's at a big-time low. There are also times a stock's gotten too far ahead of itself, leaving too little upside potential and too much downside risk. But that's not the case with any of these three names.
Take Amgen as an example. Shares are priced right around where they were a year ago, and the company's impending merger with Horizon offers clear fiscal benefits. Namely, Horizon's thyroid eye disease treatment Tepezza is already doing well, generating $446 million in sales last quarter alone. It could do even better, however, with a bigger name like Amgen selling it.
Both Cisco and Caterpillar shares are up for the past year, but both stocks are still relatively cheap. Cisco shares are priced at less than 15 times this fiscal year's per-share earnings estimates of $4.06, which is a pittance in light of its newly realized AI opportunity. Caterpillar's stock is also priced at under 15 times this year's expected profits of $19.89 per share.
That looks pretty inexpensive to me, for a heavy equipment maker in front of what could be a surprise economic recovery that rekindles construction projects here and abroad. In this vein, Dodge Construction Network's most recent forecast calls for domestic construction spending to grow 6% in 2024, led by non-building, institutional, and residential projects that often require the big machines Caterpillar manufactures.
In other words, don't sweat the outsized gains. Just take the hints dropped by August's bullish performances. There's room for more of the same ahead, particularly if you're a true long-term investor.
