U.S. equity markets have rebounded after a challenging 2022, with the Dow Jones Industrial Average having risen by 4.4% after dropping by 8.8% in 2022.
But there have been laggards. Walgreens Boots Alliance (WBA 0.57%), Nike (NKE 0.19%), and 3M (MMM 0.46%) have lost about 43%, 22%, and 19%, respectively, since the start of 2023. That makes them this year's worst-performing stocks in the Dow. Given the market's positive performance, it's jarring to see these losses.
Is the market giving a signal to stay away from these stocks? Or are these companies misunderstood, creating a buying opportunity? It's time to take a closer look at the fundamentals of each.
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Walgreens
Walgreens' troubles don't just extend to this year, which is reflected in the stock performance. The shares sell for a quarter of what they did in 2015. Management has tried to push into the broader healthcare arena, with a large number of its pharmacy retail stores offering services like clinical care.
Unfortunately, they haven't provided a significant boost to profitability thus far. In Walgreens' third fiscal quarter, which ended on May 31, the operating loss widened from $320 million to $477 million. Management also cut its fiscal-year guidance on adjusted earnings per share (EPS) to a range of $4 to $4.05, from $4.45 to $4.65.
The stock's 8.6% dividend yield seems alluring, but investors might see this as a warning sign that it's not sustainable. Walgreen's free cash flow for the first nine months of the year was a negative $414 million, and its dividends cost $1.2 billion.
Nike
Nike, known for its sneakers and apparel, has been a marketing powerhouse for some time, inking deals with athletes and celebrities that have helped it build a tremendous brand.
But it has been dealing with headwinds such as higher costs that have proved challenging to pass along to customers. Nike's fiscal fourth-quarter revenue rose by 8% after removing currency exchange conversions. But its gross margin fell by 1.4 percentage points to 43.6%, weighed down by increased costs and markdowns. Diluted EPS was off by 27% for the quarter that ended on May 31.
As the Federal Reserve remains vigilant about its inflation fight, that could cause the economy to tip into a recession, which would likely hurt sales if consumers have less discretionary income.
Nike has raised dividends for 21 straight years, and its 1.5% yield is in line with the S&P 500. Given that there are better dividend stocks, I would like to see the company pick up its sales growth, which could prove difficult in the near term as consumers feel pressured. However, with its strong brand name, the long-term prospects remain bright as its products continue appealing to younger consumers.
The stock isn't cheap, selling at a price-to-earnings ratio of 28, although that's down from earlier this year, when it approached 40.
3M
3M's results have been underwhelming. In the second quarter, adjusted sales for the industrial conglomerate -- famous for its Post-it notes, Scotch Tape, and more -- fell by 4.7%, and management recently warned about slower growth next year, too.
Plans to spin off its healthcare unit, which had flat sales in the latest quarter, should make the company more reliant on cyclical businesses. On a positive note, it has recently reached a deal to settle longstanding lawsuits by U.S. military veterans over its earplugs.
While growth-oriented investors might find 3M's stock a difficult proposition, it does pay a 6.2% dividend yield. This remains a priority, with the board of directors having increased the payment annually for more than 60 straight years. Free cash flow for the first half of the year was $1.9 billion, which was enough to cover the less than $1.7 billion in dividends.
Ideally, you can collect dividends from a solid business, but right now, with sluggish end markets, it's unclear when 3M's sales growth will pick up.
Decision time
What does this all mean for investors? Given Walgreen's challenges and uncertain future, I'd pass on the stock. Similarly, 3M's dividend might prove tempting, but I'd pass based on its growth prospects.
However, Nike has been beaten up, and patient investors should be rewarded as the company gets through a challenging economy with its ever-popular products.
