Which Dogs of the Dow Will Claw Back in 2023?

Which Dogs of the Dow Will Claw Back in 2023?

Key Points

  • The surprise return of Bob Iger as Disney CEO is perhaps the biggest reason to expect a magical turnaround.
  • Salesforce has two powerful growth forces — enterprise digital transformations and the advent of cloud computing.
  • Intel has a unique set of long-term growth catalysts but still faces many challenges.

Anyway you slice it, it was a rough year for U.S. stocks. Even the blue-chip Dow Jones 30 index fell, although a -9% return was modest relative to most major equity indices. 

Exactly two-thirds of Dow components finished the year in the red. That meant there were plenty of candidates for the dubious ‘Dogs of the Dow’ club. 

In what has become an annual ritual, investors will be scouring over 2022’s biggest losers for buying opportunities. Why is so much attention given to these underperformers?

Buying the Dogs of the Dow is a popular (and successful) investment strategy that’s been around for more than 30 years. It takes the 10 highest-yielding Dow stocks at year-end in an attempt to beat the broader benchmark. These are often the stocks that suffered the biggest downturns (and yes, the Dogs beat the market in 2022).

Here we take a different spin on the definition by focusing on the worst performers rather than dividends

It was a particularly ‘ruff’ year for these three Dow stocks. Will a more concentrated strategy of owning all three do well in 2023?

Is Disney Stock Primed For a Comeback? 

The Walt Disney Company (NYSE: DIS) finished down -44% on the year for various reasons. The initial dip was precipitated by news of subscriber losses at rival Netflix. Although Disney+ subscriptions have grown nicely, Netflix struggles to cast a dark cloud over the streaming space, bringing concerns about discretionary spending cutbacks in an inflationary backdrop. Repeated theme park closures in China, a spat with the state of Florida and a challenging third quarter then caused the stock to end the year near a 52-week low.

The biggest splash, however, was the surprise return of Bob Iger as CEO. Although the early buzz has faded, this is perhaps the biggest reason to expect a magical Disney turnaround. Mr. Iger has the track record to right the ship but will face a host of issues in the process, not the least of which is an expected recession. He will also have a limited time frame to do it and added pressure from the board to improve company profits. 

Meanwhile, under former CEO Bob Chapek, Disney invested heavily in the direct-to-consumer and theme park businesses. Disney+ has good momentum, but other investments are still unproven. With all of the uncertainty around Disney, the stock now trades at a discount to peers after long trading at a premium. 

Is the ‘Eye of the Iger’ reason enough to invest at this depressed valuation? Things should gradually get better over time, but the road back to $200 will likely be a long one.

Are Salesforce’s Secular Tailwinds in Tact?

After finishing higher for five consecutive years, Salesforce, Inc. (NYSE: CRM) plunged -48% in 2022, a prime example of the assault on high P/E tech names. The provider of customer relationship management (CRM) software is also a casualty of the strong U.S. dollar. With approximately one-third of revenue derived from international markets, foreign exchange effects weighed on profits. So too did investments in international expansion and data centers.

As for the forex headwinds, things have improved dramatically in the last few months. A weakening U.S. dollar and prospects for an eventual slowdown in Fed rate hikes should eat less into profitability in 2023. Recent outlays for overseas and data center growth will eventually bear fruit, rewarding patient investors that may have gotten in the way of the moving train. 

Macro uncertainty has forced Salesforce to shift gears toward cost management and profits, with customers becoming more cautious about software spending. This will ultimately be good for the long run, too, as will the stock’s exposure to two powerful growth forces — enterprise digital transformations and the advent of cloud computing.

Will Intel Stock Find Buyers in 2023?

Intel Corporation (NASDAQ: INTC) was the caboose of the Dow last year, finishing down -49%. On the bright side, a large dividend payout means the stock enters the new year dangling a 5.5% forward yield. Is it a carrot worth grabbing?

According to Wall Street, no. The dividend itself doesn’t override the hurdles Intel faces in 2023. Production delays compounded by lockdowns in certain international markets have Intel behind the eight-ball in meeting demand, forcing would-be customers to do business elsewhere. Increased raw materials costs and intensifying global competition are additional headwinds.

With Intel struggling to maintain profitability and market share in its core data center and cloud businesses, getting on board with the stock isn't easy, even as a contrarian play. The reasons to own it are three-plus years away.

An ambitious push into the Internet-of-Things market looks promising because Intel is focused on selling not just chips but hardware. This could make it a formidable player in the IoT space as more connected devices emerge globally. Self-driving vehicle technology arm Mobileye is also reason to be bullish longer term if Intel can dent a market controlled by Qualcomm and NVIDIA. 

The semiconductor industry is recovering, but Intel isn’t up to speed. Until it can fully participate in this upcycle, production and financial results are likely to lag peers. Intel has a unique set of long-term growth catalysts, but that may not be enough to attract investors to this dog with fleas in 2023.

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Companies in This Article:

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Walt Disney (DIS)$102.27+0.4%0.29%111.16Moderate Buy$126.29
Netflix (NFLX)$686.12+1.0%N/A47.61Moderate Buy$633.53
Salesforce (CRM)$245.06+1.3%0.16%44.08Moderate Buy$292.79
Intel (INTC)$31.09+1.5%1.61%32.39Hold$39.58
QUALCOMM (QCOM)$212.53-1.4%1.60%28.57Moderate Buy$192.13
NVIDIA (NVDA)$126.57-3.2%0.03%74.02Moderate Buy$121.77

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