February was an OK month for blue-chip stocks. All told, the Dow Jones Industrial Average ended last month 2.2% higher than where it started it.
Not every Dow Jones name followed suit though. Dow constituents Cisco Systems (CSCO -0.50%), Verizon Communications (VZ 1.17%), and Amgen (AMGN 0.22%) all lost ground in defiance of the bigger trend.
Experienced investors of course know these short-term pullbacks of quality stocks can be a buying opportunity. Just because a Dow Jones stock stumbled in any given month, however, doesn't inherently mean it's worth buying just yet. Investors should still consider the bigger picture for any prospective investment.
What went wrong
What went wrong for these three names? For Cisco, it was a so-so second quarter followed by weak guidance for the fiscal year ending in July. Revenue of $12.8 billion topped expectations of $12.7 billion, but fell 6% year over year. Earnings of $0.87 per share beat estimates of $0.84, but were also down just a bit from the year-ago comparison.
These results paired with another round of lowered revenue and earnings guidance weighed on investors' minds, dragging shares down to the tune of 3.6% for the month.
Verizon's stumble wasn't triggered by a specific development in February, but there's little doubt as to its cause. That is, shares rallied too far, too fast between October's low and January's high -- hit right as it released its fourth-quarter earnings. Since then the stock has cooled off as investors were reminded that this company, much like its wireless peers, is running out of ways to grow. Its top line is only expected to rise 1.5% this year, and only 1.4% next year. Profit growth is expected to essentially be stagnant.
Finally, chalk most of Amgen's 12.9% February tumble up to profit-taking following the early February release of its Q4 numbers -- although it wasn't its quarterly numbers that rattled the market. Rather, lukewarm results from early-stage trials of its weight-loss drug MariTide are the culprit.
Investors have been pouring into Amgen shares since the anti-obesity drug craze went into high gear in the latter half of 2023. As Leerink analyst David Risinger explained of his downgrade of the stock last month, though, it's not clear from MariTide's initial results that it will be competitive in the anti-obesity market. Risinger is further concerned that high expectations of the drug have made Amgen shares too expensive in the meantime.
The rest of the story
Given this backdrop, all three stocks' recent sell-offs make sense. As veteran investors can attest, however, these are only short-term headwinds. There's always more to the story.
Take Cisco for instance. While last quarter's fiscal lull is alarming and its forward-looking guidance is less than thrilling, the comparisons are being made to an unusually strong period for the company. Sales and earnings should start growing again next fiscal year, once its acquisition of Splunk is finalized and Cisco integrates Splunk's data-mining tech into its offerings.
Cisco is evolving as a software company -- and with Splunk in the mix, well over half of the networking giant's revenue will be recurring, or subscription-based.
That's important for a couple of reasons. For starters, software revenue tends to be high-margin revenue. Also, once a customer begins paying for Cisco's software, they're very likely to stick with it if for no other reason than it's just difficult to switch over to a competitor's technology. With shares priced at only 13 times this fiscal year's projected profits, this dynamic isn't being reflected by the stock's current value.
Neither is Amgen's likely future. Sure, the anti-obesity drug market is apt to be a big one. Goldman Sachs believes it could swell from around $6 billion per year now to an annualized figure of $100 billion as soon as 2030, in fact. There's no denying, however, that Amgen is well behind Novo Nordisk and Eli Lilly on this front -- and so the market is seeing Leerink's point about Amgen.
Now, dig deeper. Analysts are still calling for top-line growth of more than 17% from Amgen this year from a portfolio where no single drug accounts for more than 15% of its sales, and where only two of its two-dozen drugs make up more than 10% of its sales. It's also got more than 50 drug trials underway, nearly 30 of which are currently in phase 3 testing. Amgen is going to be fine with or without MariTide.
As for Verizon, it's arguably the only one out of the three Dow stocks in question that doesn't have a great bullish thesis. Even this call comes with an important footnote, however.
There's nothing inherently wrong with the wireless telecom business. But it's saturated, limiting growth opportunities. Verizon is making opportunities of its own, like offering enterprises their own private 5G wireless networks. This is still a relatively small market though.
In the meantime, recent increases in interest rates are crimping profit margins for debt-intensive businesses like telecoms. Interest expenses grew from 2022's $3.6 billion to $5.5 billion in 2023. That's a big bite out of Verizon's low-margin operation.
If your only real need is reliable dividend income, however, Verizon offers plenty of it. The company has not only paid one like clockwork every quarter since it was born out of 2000's merger of GTE and Bell Atlantic, but has raised its annual dividend payment every year for the past 17 years. That's quite a track record. Newcomers will be getting in while the dividend yield is an impressive 6.6%.
The exception to the norm
In this instance at least two of the three of the Dow's worst February performers are now compelling prospects specifically because of the discount. And the third -- Verizon -- may appeal to income-minded investors.
Do understand, though, that this much bullishness following sell-offs is an exception to the norm. More often than not a falling stock is falling for good reason, and one rough calendar month doesn't inherently mean now's the time to buy. Sometimes it can take longer for a stock to hit bottom, and longer still for a company to regroup.
Your job as an investor is to consider all these relevant factors and then weigh the risk against the reward. It just so happens that in this instance all three setbacks mean there's now more likely reward than risk.
