Top 5 Blue-Chip Stocks Picks From a New-Look Dow 30
The Dow Index – popularly known as Wall Street’s blue-chip index – has a new look since the beginning of trading on Feb 26. The restructuring of the 30-stock index resulted in the exit of medical-retailer Walgreens Boots Alliance and the entry of the e-commerce super giant Amazon.com Inc. AMZN.
The restructuring was initiated after the retail giant Walmart Inc. (WMT) decided on a 3-to-1 stock split. Unlike the other two major stock indexes — the S&P 500 and the Nasdaq Composite — the Dow is a price-weighted index and not a market-capital-weighted index.
Dow’s New Look
The Dow, which started its journey in May 1896, is always inclined toward old-economy cyclical sectors like industrials, financials and oil-energy. However, its peers have more representation from growth sectors like technology, communication services and consumer discretionary.
As a result, the blue-chip index under performs its peers. In 2023, the tech-heavy Nasdaq Composite jumped 43.4%. The broad-market S&P 500 Index also saw an impressive rally of 23.9%. However, the Dow was up just 13.7%. Year to date, the Dow, the S&P 500 and the Nasdaq Composite are up 3.3%, 7.1%, and 8.6%, respectively.
Inclusion of Amazon is seen as a strategic move to increase the blue-chip index’s exposure to new-economy stocks. Broadly, Amazon is categorized as a consumer discretionary company. However, its massive adoption of high-end technologies compelled a large-section of financial analysts to categorize it as a technology bigwig.
Amazon’s entry will significantly increase the exposure of the blue-chip index in the e-commerce, consumer retail and technology space. Amazon’s weight in the Dow will rank 17th out of the 30 stocks. Walmart’s weight will drop to 26 from 17. Meanwhile, UnitedHealth Group Inc. (UNH) will remain the most heavily weighted stock on the Dow.
Dow Likely to Gather Momentum
On Feb 23, the Dow recorded its all-time highs of 39,282.28 on an intraday basis and 39,131.53 on a closing basis. Technically, at its current level of 38,972.41, the Dow is well above its 50-day and 200-day moving averages of 38,027.55 and 35,253.78, respectively.
The 50-day moving average line is generally recognized as a short-term trendsetter in financial literature, while the 200-day moving average is considered a long-term trend setter.
Historically it has been noticed in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the asset (in this case the Dow Index) becomes a strong possibility.
Our Top Picks
We have narrowed our search to five Dow stocks that have strong earnings growth potential for 2024. These stocks have seen positive earnings estimate revisions in the last 30 days. Finally, each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Amazon.com Inc. has benefited from Prime and AWS momentum. The strengthening AWS services portfolio and its growing adoption rate contributed well to the performance of AWS. Ultrafast delivery services and an expanding content portfolio have been beneficial. Strengthening relationships with third-party sellers also favored the company. Moreover, AMZN’s robust advertising business contributed well.
Notably, improving Alexa skills along with robust smart home product offerings continues to act as a tailwind. AMZN’s strong global presence and solid momentum among small and medium businesses remain positives. Growing capabilities in grocery, pharmacy, healthcare and autonomous driving are the other catalysts. Also, deepening focus on generative AI is a major plus.
Zacks Rank #1 Amazon has an expected revenue and earnings growth rate of 11.5% and 40%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last seven days.
American Express Co. AXP has benefited from growth initiatives, like launching new products, reaching new agreements and forging alliances. Consumer spending on T&E, which carries higher margins for AXP, is advancing well. AXP’s balance sheet looks strong with ample cash. Solid cash-generation abilities enable the pursuit of business investments and prudent deployment of capital via buybacks and dividends.
Zacks Rank #2 American Express has an expected revenue and earnings growth rate of 9.4% and 14.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.6% over the last 30 days.
International Business Machines Corp. IBM is likely to benefit from the rising demand of its hybrid cloud and AI solutions. Increased watsonx adoption by clients is a tailwind. IBM’s collaboration with SAP to tap generative AI technology within the retail industry will likely generate incremental revenues. Strong free cash flow generation of IBM provides the financial flexibility required for strategic investments in the evolving business environment.
Zacks Rank #2 International Business Machines has an expected revenue and earnings growth rate of 3.1% and 4.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.5% over the last 30 days.
Microsoft Corp. MSFT has gained from strong Intelligent Cloud and Productivity and Business Processes revenues. Productivity and Business Processes revenues of MSFT were driven by the strong adoption of Office 365 Commercial solutions.
Microsoft 365 Consumer subscribers grew to 78.4 million. Continued momentum in the small and medium businesses, frontline worker offerings and a gain in revenue per user drove the top line. Intelligent Cloud revenues of MSFT were driven by growth in Azure and other cloud services. Solid adoption of Azure AI, which has a clientele of more than 53,000 customers holds promise.
Zacks Rank #2 Microsoft has an expected revenue and earnings growth rate of 15% and 18.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last seven days.
The Travelers Companies Inc. TRV boasts a strong market presence in auto, homeowners’ insurance and commercial U.S. property-casualty insurance with solid inorganic growth. A high retention rate, a rise in new business and positive renewal premium change bode well.
TRV’s commercial businesses should perform well owing to market stability. TRV remains optimistic about the personal line of business, given growth at profitable agencies like auto and homeowners business. Strong and reliable returns from the growing fixed-income portfolio should drive net investment income. Sufficient capital boosts shareholder value. TRV aims for a mid-teens core return on equity over time.
Zacks Rank #2 The Travelers Companies has an expected revenue and earnings growth rate of 11.8% and 34.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 30 days.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
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The Travelers Companies, Inc. (TRV) : Free Stock Analysis Report
