The Dow Jones Industrial Average, or the Dow, is an index containing 30 blue chip stocks, considered among the most prominent and influential companies in the U.S. The index is a popular barometer for how the stock market is doing.
The Dow is a small circle, a prestigious club, so it's a great place to look for winning stocks with long track records of success. Inside the index, Salesforce (CRM 0.42%), Visa (V -0.23%), and Nike (NKE 0.19%) stand out as potential bargains that could do well over the next few months and beyond.
Here is a breakdown of the opportunity investors have in each stock.
Salesforce
Salesforce has been around the block as one of the original enterprise software companies. It started as a customer-relationship management software but has expanded to become a digital platform where you can run an entire company, including sales, marketing, commerce, and internal collaboration.
Providing so many services and tools under one roof is a massive value for companies worldwide, especially as they continue migrating to the digital economy: Say goodbye to paper records and hello to the cloud. The company is guiding for total revenue of $35 billion this year but believes its addressable market could hit $290 billion by 2026. In other words, there's no shortage of growth opportunities.
So why has the stock fallen? The Federal Open Market Committee (FOMC) has ratcheted interest rates to fight inflation, which cools the economy. You can see below that Salesforce's growth slowed as rates rose, which doesn't look like a coincidence.
CRM Revenue (Quarterly YoY Growth) data by YCharts
But now trading at a forward P/E of 25, the stock may have gotten too cheap. Analysts believe annual earnings growth will average between 22% and 23% over the next three to five years, putting an attractive PEG ratio on the stock of just over 1. Don't let the short-term economic challenges distract you from what is a proven compounder at an attractive price.
Visa
Visa might be the world's most lucrative business. It operates a payment network that links money between banks and merchants when you use a payment card. It's like a tollbooth operator on the payment network highway, collecting a fee on every transaction. Its payment volume in the fiscal third quarter alone was more than $3.2 trillion.
Visa makes a ton of profit. It has 80% gross margin and turns $0.61 of each revenue dollar into free cash flow because the network doesn't require a lot of investment, even as it processes more payments. Visa dominates the global payment network business outside of China's UnionPay, along with a few competitors. Since Visa has so many people using its payment cards worldwide, it makes little sense for merchants to support much else, a phenomenon called the network effect.
Rising interest rates are impacting the entire economy, and hitting Visa too. Analysts have lowered their growth estimates accordingly. However, Visa might be the stock to own if you are worried about inflation. Since Visa charges fees as a percentage of the transaction, its fee revenue will inflate along with prices.
V EPS LT Growth Estimates data by YCharts
Visa trades at a forward P/E of 26 and a PEG ratio of just under 2. That's not a bargain, but considering the quality of Visa's business and its tremendous cash flow, it's a stock that could be worth paying up for. Buying and holding Visa stock could prove lucrative if economic sentiment improves or Visa's business continues to grow over the long term.
Nike
Sporting apparel giant Nike has had a tough stretch. The stock has declined nearly 20% since January. But now could be the right time to revisit it. The company has worked through some challenges over the past year, including surplus inventory and economic headwinds in China, an important market for Nike.
Nike isn't doing awful, but investors have seen growth and cash flow slip from the high Wall Street has gotten used to over the years. Unfortunately, that high standard created a lofty valuation for shares, which traded as high as 40 times 2023 earnings earlier this year. A high valuation raises the bar, which can mean a harder fall when you fall short.
NKE Revenue (Quarterly YoY Growth) data by YCharts
The company recently reported fiscal first-quarter earnings, which came in better than expected, indicating that Nike could soon turn the corner. At a forward P/E today of 24 and analysts forecasting annual earnings growth near 16% over the coming years, the stock's punishment could be nearing an end. The PEG ratio is reasonable at 1.5.
Sure, shares of any of these three companies could continue falling. After all, the market is unpredictable. Still, the valuations have become enticing enough to consider these three to be fundamentally sound winners.
