Although acquiring shares of companies listed in the Dow Jones Industrial Average tends to be a smart wager, shifting economic circumstances might raise a cloud of suspicion over certain doomed Dow stocks to avoid. To be 100% clear, this list represents a mental exercise based on forward circumstances that may or may not materialize. It’s just for entertainment purposes so don’t take my words too seriously.
Recently, I sat dawn with CGTN America anchor Phillip Yin to discuss everyone’s favorite topic, inflation. During the segment, I mentioned that a consensus of Wall Street analysts believe that disinflationary trends are moving in the right direction. However, it’s not moving fast enough for the Federal Reserve to forego future interest rate hikes. That led to a spirited talk that also undergirds concerns for high risk Dow stocks.
Basically, Yin got animated in part because of the concerns associated with continued rate hikes. I understand him completely because a legitimate risk of a recession exists. And that would potentially make even venerable names unstable Dow stocks to avoid, I’m afraid.
Let’s hope for the best because a recession does no one any good. Still, if a downturn materializes, these are the Dow stocks destined for disaster.
Just recently, Barron’s came out with an op-ed that declared that Visa (NYSE:V) and its rival Mastercard (NYSE:MA) are strangely undervalued. Because of the underlying discount, both stocks represent buys. Admittedly, I don’t quite get the undervalued argument. V trades at a forward multiple of 24.49 while MA trades at nearly 33x. Since the credit services industry features a median forward price-earnings ratio of 8.58x, both are technically overvalued.
However, because of the enormous volume of transactions that these two credit-card giants service, their cut represents a lucrative business. So, on paper, Visa doesn’t appear to be one of the doomed Dow stocks to avoid. And if the economy manages to avoid a recession, V could even become a security to buy, as Barron’s suggested.
Nevertheless, total household debt jumped to a record $17.05 trillion in the first quarter of 2023. And credit card debt by itself quickly approaches the $1 trillion mark. If the Fed decides to raise rates again, at some point, consumers would be forced to cut their plastic. That makes Visa one of the high risk Dow stocks.
On paper, global customer relationship management leader Salesforce (NYSE:CRM) appears a shoo-in for securities to buy, not doomed Dow stocks to avoid. After all, since the beginning of this year, CRM gained nearly 71% of equity value. Over the past one-year period, the gains diminished but are still robust at 43% up. By most outside measures, CRM seems to be working a recovery narrative.
Even better, another Barron’s article pointed out that Salesforce will soon raise its list prices by an average 9% for its cloud-based software. However, CRM gained on the announcement because consumers are likely to pay it with minimal fuss. Plus, even with the price hike, Salesforce should benefit from myriad competitive advantages. So, why consider CRM one of the unstable Dow stocks?
It comes down to the valuation. Trading at 606X trailing earnings, 31x forward earnings, 103x tangible book value and 7x trailing sales, you’re not exactly getting a deal with CRM stock. Fundamentally, the problem is that should a recession materialize, Salesforce may have difficulty justifying these premiums.
Goldman Sachs (GS)
A multinational investment bank and financial services firm, Goldman Sachs (NYSE:GS) on the surface doesn’t seem like one of the doomed Dow stocks to avoid. Representing one of the most well-recognized and well-capitalized enterprises in the world, Goldman probably won’t court literal disaster. However, investors shouldn’t be complacent with GS. It can still hurt you if economic circumstances go awry.
Sure, GS stock may be up nearly 17% in the trailing year but let’s face it: you must be careful with Goldman. Since the January opener, GS dipped 5% of equity value and it could be much worse if the economy doesn’t cooperate. For example, Goldman represents a top bookrunner for initial public offerings (IPOs). However, in the second quarter of this year, IPO volume declined 3% year-over-year. That doesn’t sound like much until you realize that in 2022, total global IPO value came in at $170.7 billion, a decline of 72% YOY.
Plus, in a down economy, people might not be so eager to invest. Therefore, the advisory business may suffer. All in all, GS makes a case for Dow stocks destined for disaster (the metaphorical but still painful kind).
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.