As anyone who reads my columns regularly knows, I’m generally upbeat on stocks. That’s because I believe that inflation has peaked, the Federal Reserve is poised to become much more dovish. In addition, the Street has, for some time, underestimated the importance of the exceptionally strong employment market. However, I believe that there are some good Dow stocks to sell at this point.
That’s because, in this stock picker’s market, there are several sectors that investors should definitely avoid. For example, with consumers being hurt by inflation and many still spending much more money on experiences than products, companies that specialize in selling fairly expensive products may struggle. While that trend should reverse at some point in the medium term, given the negative commentary of a number of companies that specialize in selling goods and poor macro manufacturing data, it appears to have been stickier than I previously believed.
That’s particularly true for firms whose products are relatively expensive but rely on attracting lower-middle-class and working class-consumers.
Oil companies may also be hurt by governments actions, while insurers could struggle due to the destruction wrought by Hurricane Ian, for example.
With all of that in mind, here are seven good Dow stocks to sell.
| AAPL | Apple | $151.33 |
| TRV | Travelers Companies | $176.65 |
| CVX | Chevron | $174.38 |
| MMM | 3M | $117.90 |
| HD | Home Depot | $290.06 |
| DIS | Disney | $103.57 |
| PG | Procter & Gamble | $130.27 |
Apple (AAPL)
There’s now clear evidence that Apple (NASDAQ:AAPL) is getting being hurt by a goods-to-services shift. According to a recent report, weak demand for the iPhone 14 has caused the hardware giant to lower the “production of iPhone 14 Plus and is increasing the output of the more expensive iPhone 14 Pro.”
Also expressing caution about Apple on CNBC was investor Brenda Vingiello, who warned that the company could be hit by waning consumer demand for PCs and smartphones in the wake of the pandemic. Additionally, she noted that AAPL gets 60% of its revenue from outside of the U.S. Some of those overseas markets, especially China and Europe, have problems that are much worse than those of America. Additionally, the U.S. dollar’s strength is likely to negatively impact Apple’s overseas profits.
Despite these issues, the price-earnings ratio of AAPL stock remains fairly elevated at 23.4. That’s fairly high for a company whose revenues are growing relatively slowly; on average, analysts expect the firm’s revenues to increase 4.8% to $412 billion in 2023, up from $393 billion this year.
Travelers Companies (TRV)
Travelers Companies’ (NYSE:TRV) third-quarter results, reported on Oct. 19, were uninspiring, thanks to Hurricane Ian. Specifically, its net income sank to $454 million versus $662 million during the same period in 2021. Additionally, its top line increased just 6%. On a positive note, its revenue from its “net written premiums” climbed 10% year over year. Still, Ian caused the firm’s “catastrophe costs” to jump 11% year over year to “$512 million pretax, net of reinsurance, from the year-earlier period,” The Wall Street Journal’s Leslie Scism reported.
Ian could have been much worse for Travelers, but TRV and other companies had decided to offer relatively few homeowners’ insurance policies in the hurricane-prone state. However, with climate change causing the damage and frequency of storms to increase a great deal, the next extremely ruinous hurricane, flood, or tornado could occur in a highly populated state to which Travelers is much more exposed. Such an event, in turn, could cause TRV stock to sink meaningfully. Consequently, I urge investors to sell TRV and its peers.
Chevron (CVX)
Many haven’t realized it yet, but the world recently changed for Chevron (NYSE:CVX) and its peers in the oil and gas sector. Specifically, Western governments are no longer sitting on their hands as oil and gas prices soar; instead, these governments are realizing that they can take actions that stymie price jumps caused by the “animal spirits” of profit-hungry traders.
In the U.S., the Biden Administration’s releases from the U.S. Strategic Petroleum Reserve (SPR) have caused oil prices to sink. Meanwhile, the EU’s actions have caused European natural gas prices to tumble to around prewar levels. Once investors internalize the idea that Washington and Europe are determined to prevent oil and gas prices from soaring, their appetite for CVX stock is likely to take a big hit.
Also worth noting is that 30 leftist members of Congress recently signed a letter to President Joe Biden calling on him to work harder to end the war in Ukraine. If pressure ramps up on the administration and on European governments to end the war, the fighting could indeed stop sooner rather than later, causing oil and gas prices to sink and meaningfully pushing down CVX stock.
3M (MMM)
3M (NYSE:MMM) just reported weak third-quarter results. Meanwhile, the company is facing a number of lawsuits that could significantly undermine its financial position. It’s another one of the top Dow stocks to sell.
3M’s sales dropped 4% year-over-year to $8.6 billion, while its operating cash flow tumbled 18% year over year. Additionally, 3M cut its 2022 sales guidance, and now expects its revenue to fall 3% to 3.5% this year, as compared to its previous outlook for a 0.5%-2.5% decline. The conglomerate anticipates that its sales, excluding acquisitions, will climb 1.5% to 2% this year. But given the current, high-inflation environment, that’s a very unimpressive increase indeed.
Meanwhile, over 230,000 lawsuits have been filed against 3M for its allegedly damaging earplugs. Partially because of the legal issue, Bank of America (NYSE:BAC) recently reiterated its “underperform” rating on the shares.
On Aug. 29, Morgan Stanley (NYSE:MS) analyst Joshua Pokrzywinski estimated that 3M’s liability for the earplugs could reach $14 billion with potential for something higher. The analyst kept an “underweight” rating on the shares. As of the end of last quarter, 3M has $3 billion of cash and $17.2 billion of debt, so $14 billion of liability would indeed greatly undermine its financial position at best and make its viability going forward uncertain at worst.
The firm is trying to spin off its healthcare unit, likely in order to prevent the parent company from being hurt by the lawsuits. However, the move has been challenged in court.
Home Depot (HD)
The tremendous slowdown in the housing sector, along with the goods-to-services spending shift, isn’t great news for Home Depot (NYSE:HD). It’s another one of the top Dow stocks to sell.
In September, U.S. existing home sales fell 1.5% versus August and tumbled 24% year-over-year.
“Three out of the four major U.S. regions notched month-over-month sales contractions, while the West held steady. On a year-over-year basis, sales dropped in all regions,” the National Association of Realtors reported. The continuing housing slump is bad news for Home Depot, as consumers tend to spend a great deal of money to improve the homes into which they move.
Further, as consumers spend more money on experiences, they’ll have less to spend on upgrading their homes. Much like Apple, Home Depot benefited a great deal from spending patterns during the pandemic. Now that those patterns have reversed, HD’s financial results are likely to sink. Also boding badly for HD stock, research firm Evercore recently lowered its rating on Home Depot’s competitor, Lowe’s (NYSE:LOW) to in-line from outperform.
“Our downgrade is based on the view that slower [home improvement] demand and disinflation could push comps lower in 2023, making margin gains muted,” the firm explained. While Evercore said it was more bullish on HD stock, I still think that the firm’s assessment of Lowe’s indicates that investors should not expect good news anytime soon from Home Depot.
Disney (DIS)
I’ve been bearish on Disney (NYSE:DIS) stock for a few years, citing the negative impacts of the cord-cutting trend. The Street finally realized the truth of these points, causing DIS stock to tumble 34% so far this year. But with those trends continuing and DIS still trading at a relatively high forward price-earnings ratio of 19, the shares are likely to decline much further going forward. It’s another one of the top Dow stocks to sell.
Ominously for Disney, Wells Fargo (NYSE:WFC) predicted in Aug. that cord cutting would continue to be “elevated given all the content shifting to streaming, and consumers looking to trim their subscriptions due to macro and/or subscription fatigue,” In Q2, the number of consumers paying traditional TV bills fell “5.2% year-over-year,” the firm noted, worse than the 3.7% decline in Q1. For 2022, 2023, and 2024, Wells expects the metric to sink 5.8%, 6.7%, and 6.9%, respectively.
Procter & Gamble (PG)
Procter & Gamble (NYSE:PG) stock has a rather high price-earnings ratio of 22. That’s because many investors are predicting that the economy will nosedive over the next year and see PG as a safe haven. But, as I’ve stated in the past, I believe that the strong employment trend, along with America’s first manufacturing boom in many decades, will prevent the economy from meaningfully sinking.
If I’m correct (and so far I have been), then the valuation multiples of PG stock are likely to sink tremendously going forward. Further reducing the attractiveness of PG, its profitability actually fell last quarter, as its operating income dropped to $4.93 billion from $5.02 billion during the same period a year earlier. And in its fiscal 2022, its OI declined to $18.6 billion from $18.7 billion during the prior year.
On Oct. 10, Goldman Sachs (NYSE:GS) downgraded the PG stock to neutral from buy, citing valuation. The firm does not believe that PG’s market share is likely to rise going forward.
Nike (NKE)
Nike (NYSE:NKE) is one of the top Dow stocks to sell. With consumers spending much more money on experiences, they have less money left over to spend on Nike’s rather expensive footwear. Adding to Nike’s woes, the company relies on China for a significant amount of its revenue. In its fiscal first quarter, Nike’s sales rose only 3.6% year-over-year. Given the high-inflation environment, that’s not an impressive increase. Meanwhile, the company’s gross margin sank 2.2 percentage points YOY to 44.3%.
And perhaps most importantly, the footwear maker’s inventories soared 44% YOY. While the company blamed the increase on “supply chain”issues, I would not be surprised if weaker-than-expected demand also actually played a significant role in the inventory jump.
Expressing caution on NKE stock on Oct. 11, Bank of America (NYSE:BAC) wrote, “We would like to see progress on clearing through the excess inventory and have better visibility on China demand before turning more constructive on the name.” The firm kept a neutral rating on NKE stock.
On the date of publication, Larry Ramer 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.