We recently compiled a list of the 9 Best Dow Stocks to Buy According to Analysts. In this article, we are going to take a look at where NIKE, Inc. (NYSE:NKE) stands against the other Dow stocks.
Since its introduction in 1896, the Dow Jones has undergone significant changes but remains a popular benchmark for measuring the economy and the overall stock market outlook. While the Index has gained 13% year to date, it has lagged the S&P 500, up by 21% over the same period.
The significant underperformance is because the Dow is mostly made up of blue-chip American companies, most of which have come under pressure amid deteriorating macroeconomics. While the Index is mostly made up of financial services companies at 23%, followed by technology at 20%, it has felt the full brunt of deteriorating economic conditions.
READ ALSO: 8 Worst Performing Tech Stocks in 2024 and 10 Worst Performing Blue Chip Stocks in 2024.
The U.S. economy is reeling from the effects of high interest rates, resulting in a slowdown in the labour market, and the manufacturing sector has significantly affected the Dow holdings. Additionally, the soaring geopolitical tensions in the Middle East have rattled investors’ sentiments, resulting in most of them shunning equities in favor of safe havens like bonds and treasuries.
The uncertainty around the upcoming U.S. presidential election has only exacerbated the situation, with investors shunning stocks that would be affected mainly by a change of policies once there is a leadership change at the White House. According to analysts at Bank of America, who ends up in the White House and Congress could have a significant impact on critical corners of the stock market.
“Profits accelerating are far more important than who is sitting in the Oval Office. But politics can make or break sub-sectors,” the firm wrote in a research note to investors.
Amid the headwinds, the overall equity market has been trading higher, with major indices led by the Dow and the S&P 500 rallying to record highs. The strong gains have come on most companies delivering solid financial results and shrugging off the effects of high interest rates. Nevertheless the rallies have resulted in overstretched valuations, raising serious concerns for the investment community.
“The market had moved into overbought territory, making it vulnerable to anything it perceives as negative … It’s now worried that the Fed has not declared victory on inflation, and not to mention, the concerns post-election,” said LPL Financial chief global strategist Quincy Krosby.
A resilient U.S. economy that has steered clear of recession has helped support most stocks in the Dow, helping fuel the upward momentum. The International Monetary Fund thinks growth in the U.S. will remain robust. In its latest World Economic Outlook, the IMF increased its estimate for U.S. GDP in 2024 to 2.8% from its 2.6% forecast in July while raising its 2025 growth forecast for the country. It’s the only advanced economy with its economic trajectory revised upwards for both years by the IMF. Nevertheless, it has warned of slowdowns in emerging markets.
“Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries. Having growth stuck in low gear could also further exacerbate income inequality within economies,” the IMF warned.
With the U.S. economy expected to remain resilient as the Federal Reserve pushes forth with interest rate cuts, Dow stocks that have underperformed are well poised to bounce back. A lower interest rate environment on the back of improved economic conditions heading into year-end would make the case for the best Dow stocks to buy, according to analysts.
Our Methodology
To compile our list of the best Dow stocks to buy according to analysts, we started by analyzing the Dow Jones Industrial Average. We screened these stocks based on average price targets, focusing on stocks with significant upside potential. Finally, we ranked these companies in ascending order based on their price target upside as of October 23. We have also mentioned the hedge fund sentiment around each stock.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of trainers and athletes displaying a wide range of athletic and casual footwear.
NIKE, Inc. (NYSE:NKE)
Average Upside Potential as of October 23: 13.23%
Number of Hedge Fund Holders: 66
Apparel and footwear giant NIKE, Inc. (NYSE:NKE) has been under pressure for the better part of the year amid disappointing financial results and guidance that have sent jitters about the company’s growth metrics. The stock was yet again under pressure after it delivered disappointing second-quarter results, with revenues dropping 10% and profits down 285 year over year. Failure to provide a forecast for the fiscal year ending in May also rattled investors.
Amid the disappointing results and muted outlook, Nike remains one of the best Dow stocks to buy, according to analysts, as it is in a transition period. NIKE, Inc. (NYSE:NKE) has already appointed Elliott Hill as its new CEO, tasked with reinvigorating its growth prospects. In addition to a new CEO, the company boasts of one of the strongest brands as a leader in the global sportswear industry, affirming its long-term prospects.
NIKE, Inc. (NYSE:NKE) continues to dominate the global sportswear market. Decades of innovation and skilful marketing to establish a strong customer connection have led to this position. Because of pricing power, the unique brand has reported an average gross margin of 44.7% over the last ten years.
While Nike is trading at an average P/E of 23, it is significantly lower than its average P/E of 37 in the past decade. Additionally, analysts on Wall Street rate the stock as a Buy with an average price target of $92.19, implying a 13.23% upside potential.
According to the Insider Monkey database, 66 hedge funds held bullish positions on NIKE, Inc. (NYSE:NKE) at the end of Q2 2024. This indicates a strong interest in the stock among institutional investors, despite a slight decrease from 71 in the previous quarter.
Mar Vista Investment Partners’ Mar Vista Focus strategy stated the following regarding NIKE, Inc. (NYSE:NKE) in its Q2 2024investor letter:
“NIKE, Inc.’s (NYSE:NKE) stock declined following management’s revised forecast for fiscal year 2025, projecting negative mid-single-digit revenue growth instead of the previously anticipated positive growth. The company has observed a marked slowdown in lifestyle product sales since April, a trend that persisted into June. Our current projections indicate that both sales and earnings will fall 15-20% below the conservative estimates set by management just a quarter ago. This substantial downward revision in sales and earnings is attributed to insufficient product innovation, wholesale channel shift, and intentional reduction of supply in lifestyle franchises. While the negative adjustments to guidance could potentially act as a clearing event for the stock, the degree of conservatism in the new projections remains uncertain.
Nike maintains its position as the global leader in sportswear. However, its revenue growth has been hampered by a lack of innovation, and deteriorating macroeconomic conditions in the US and China further complicate its recovery. The company’s renewed focus on innovation and efforts to re-engage with wholesale channels may eventually help restore growth, but we believe increased skepticism regarding management’s ability to execute is justified.”
Overall NKE ranks 7th on our list of the best Dow stocks to buy according to analysts. While we acknowledge the potential of NKE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than NKE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.