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 Microsoft Corporation (NASDAQ:MSFT) 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 development team working together to create the next version of Windows.
Microsoft Corporation (NASDAQ:MSFT)
Average Upside Potential as of October 23: 17.75%
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) has emerged as the biggest winner amid the artificial intelligence race owing to its multibillion-dollar investments in OpenAI and other generative A.I. innovations. Nevertheless, the company boasts a robust business empire spanning software, cloud computing, gaming, and devices, which is why it is one of the best Dow stocks to buy, according to analysts.
Microsoft Corporation (NASDAQ:MSFT)’s Azure cloud computing division has benefited most from A.I., as businesses use its platform to develop their own A.I. solutions. Similarly, as evidenced by revenue growth of between 29% and 30% over the last few quarters, the unit is becoming a major contributor to underlying growth. The business is looking at A.I. to support growth in areas other than cloud computing. Search is one area benefiting from Microsoft A.I. investments following the integration into Bing search to better compete against Google.
Another significant success story for A.I. is its GitHub Developer platform, where users have resorted to Copilot. This AI assistant can offer suggestions while developers type and even finish coding tasks. Additionally, Microsoft Corporation (NASDAQ:MSFT) is pursuing growth in gaming following its acquisition of Activision Blizzard, which provides another avenue for generating revenues and long-term value.
While the stock trades at a 10.5% premium with a price-to-earnings multiple of 35.5, it is expected of a company with tremendous opportunities for growth. The stock rewards investors with a 0.79% Dividend yield for generating passive income. Likewise, Wall Street analysts rate it as a buy with an average price target of $503.38, implying a 17.75% upside potential.
Additionally, Insider Monkey’s Q2 data reveals that 279 hedge funds have invested in Microsoft Corporation (NASDAQ:MSFT), making it one of the most popular stocks among hedge funds at the moment.
Overall MSFT ranks 3rd on our list of the best Dow stocks to buy according to analysts. While we acknowledge the potential of MSFT 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.