We are in the last month of a disappointing 2022. Record-high inflation and its consequence in the form of an extremely hawkish Fed have pushed investors’ confidence down to its nadir. Concerns regarding slowing economic growth and a possible recession have resulted in severe volatility throughout the year.
U.S. stock markets are witnessing a solid rally since mid-October, which is likely to extend till the year-end. We have selected four Dow stocks with a favorable Zacks Rank to gain from the ongoing rally. These stocks are — Caterpillar Inc. CAT, Merck & Co. Inc. MRK, UnitedHealth Group Inc. UNH and Walmart Inc. WMT.
Dow Suffers the Least
Year to date, the three large-cap-centric stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have tumbled 5.4%, 14.5% and 26.6% respectively. On Dec 1, the Dow — popularly known as the blue-chip index of Wall Street — technically exited the bear territory after closing more than 20% higher over its recent low posted on Sep 30.
The primary concern of the U.S. economy is soaring inflation which is currently at its 40-year high. In order to combat mounting inflation, the Fed has already hiked interest rate sharply by 3.75% year to date.
A higher interest rate is detrimental to growth stocks, especially the technology players. In contrast to the Nasdaq Composite and the S&P 500 indexes, the 30-stock Dow is more inclined to cyclical stocks rather than growth stocks. Therefore, the index has suffered the least.
Our Top Picks
We have narrowed our search to four Dow stocks. These stocks have solid potential for December and have seen positive earnings estimate revisions in the last 90 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our four picks in the past three months.
Image Source: Zacks Investment Research
Merck has been benefiting from strong sales of Keytruda, Lynparza and Bridion. With continued label expansion into new indications and early-stage settings, Keytruda is expected to remain a key top-line driver of MRK.
Animal health and vaccine products are the core growth drivers. Merck’s new COVID oral antiviral pill, Lagevrio will be a key top-line driver in 2022. MRK boasts a strong cancer pipeline, including Keytruda, which should help drive long-term growth.
Merck has an expected earnings growth rate of 22.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 60 days.
Caterpillar’s revenues and earnings grew year over year for six straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of the ongoing supply-chain snarls and cost pressures.
We expect CAT’s adjusted earnings per share for 2022 to grow 11.6%, while revenues are predicted to rise 11.2%. The Construction Industries space is expected to benefit from rising construction activities in the United States and other parts of the world.
Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. CAT’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives should help Caterpillar deliver outsized returns.
Caterpillar has an expected earnings growth rate of 27.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2% over the last 30 days.
Walmart has been benefiting from its robust omnichannel operations due to its efforts to enhance both store and online experience. WMT has been particularly gaining from its efforts to boost delivery services through acquisitions and partnerships. WMT’s U.S. comp sales continued to benefit from an increased market share in the grocery segment.
Walmart has an expected earnings growth rate of 8.6% for next year (ending January 2024). The Zacks Consensus Estimate for current-year earnings improved 0.9% over the last 30 days.
UnitedHealth has been benefiting from a strong market position and an attractive core business that continues to be driven by new deals, renewed agreements and expansion of service offerings.
UNH’s solid health services segment provides diversification benefits. UnitedHealth’s government business remains well-poised for growth. A sturdy balance sheet enables investments and prudent capital deployment through share buybacks and dividends.
UnitedHealth has an expected earnings growth rate of 15.7% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 30 days.
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