Call it early Christmas - or the “Santa Claus rally” - but after three consecutive months of losses, bulls finally had something to cheer in November as both the Dow Jones Industrial Average ($DOWI) and S&P 500 Index ($SPX) rose almost 9% each to record their best months of the year. Meanwhile, the Nasdaq Composite ($NASX) rose 10.7% amid the rally in tech stocks. November played to the historical script of being a seasonally strong month – just as September held on to its reputation as the worst month of the year for the market.
That said, even as the Dow Jones is just marginally below its all-time highs, many of its components are underperforming - and even worse, some are in the red for the year. In particular, Nike (NKE) and Walt Disney Company (DIS) are two Dow Jones components that are underperforming the index in 2023, but I believe both of these stocks could deliver the goods in 2024. Here’s why.
Nike Stock Underperforms the Broader Dow Jones
While Nike stock has come off its 2023 lows, it is still down 2% for the year to underperform the Dow Jones Industrial Average. Nike stock hit an all-time closing high of over $173 in November 2021, but fell to a two-year low of $82.22 by October 2023 amid the broad-based sell-off in markets that month.
However, the stock subsequently rebounded, aided by strong results for the fiscal first quarter of 2024. While Nike missed consensus revenue estimates for the first time in two years, it more than made up for that shortfall with better-than-expected margins and profits.
There are valid concerns over demand for Nike products in the U.S. – its biggest market – amid slowing consumer spending. There are also fears that the resumption of student loan repayments will lead many borrowers to cut down on discretionary spending, including on Nike's products. However, Nike still expects its overall revenues to grow in mid-single digits in the fiscal year, and also maintained its guidance of gross margin improvement between 1.4%-1.6%.
Like many of its fellow apparel and retail companies, Nike has been grappling with excess inventories, and had to resort to discounting to clear them. However, in its fiscal Q1, inventory fell 10% to $8.7 billion.
Commenting on the inventory levels, Nike’s CFO Matthew Friend said during the fiscal Q1 earnings call, “On the whole, we’re very comfortable with the level of inventory in the marketplace in relation to the retail sales that we’re seeing as we begin increasing levels of wholesale sell in our second half.”
Nike Stock Looks Like a Good Buy for 2024
Nike stock now trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 29.5x. Those multiples have risen from the October lows, but they are a discount to the stock's 5-year and 10-year multiples.
Wall Street analysts have rated NKE as a “Moderate Buy,” with the mean target price of $123 implying expected upside of about 7% from current levels. Overall, Nike looks among the best Dow stocks to buy for 2024, even as the risk-reward might not be as favorable as it was in October.
Disney Is Another Top Dow Jones Stock for 2024
While Disney stock is not in the red this year like Nike, it's still underperforming the broader equities market. The entertainment giant has been a perennial underperformer, and its returns trail that of the Dow Jones over the last decade.
Meanwhile, Disney looks like a good Dow stock to buy in December for the following reasons:
- Cost cuts and streaming profitability: Disney has reiterated multiple times that its streaming business – which has been a loss-making venture since it was founded in 2019 – is on track to reach breakeven by the end of this fiscal year. The company has also expanded the scope of cost cuts, and is now targeting structural cost savings of $7.5 billion – $2 billion higher than the previous forecast. These cost cuts, coupled with projected streaming profitability, should help to improve Disney’s earnings in the coming quarters, and markets should also eventually appreciate their impact.
- Expansion of Parks: Disney has been taking steps to improve the customer experience at its hugely profitable parks, with CEO Bob Iger committing to invest $60 billion over the next decade. Last month, it opened the “World of Frozen” based on the popular Frozen franchise at Hong Kong Disneyland, and later this month it plans to open a Zootopia-themed area at Shanghai Disneyland. The company has signaled that it intends to allocate capital towards businesses that generate higher profits, instead of chasing unprofitable growth.
- Reasonable valuations: Disney shares trade at an NTM PE multiple of 20.9x, which is lower than historical averages. As the company’s streaming business starts contributing to the bottom line – instead of eating into the earnings of other businesses – it should see a rerating in the coming quarters.
To sum it up, while the “magic” has been missing from Disney shares for a decade, the business transformation under Iger puts it on a path for strong returns over the next couple of years.
On the date of publication, Mohit Oberoi had a position in: DIS , NKE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
