It has been a difficult year for the market; even the average blue chip didn’t prove immune to weakness. the Dow Jones Industrial Average (DJINDICES: ^DJI) is currently 10% below its January high. And given the latest round of headlines about inflation and Russia’s invasion of Ukraine, it certainly looks like things could get worse before they get better.
Seasoned investors, however, know that most headwinds are not just temporary, but also end up buying opportunities.
To that end, here’s a look at three Dow names that have been lackluster performers lately and may even drift lower before all is said and done. But they could well rebound by the second half of the year and rally beyond 2022. Here they are in no particular order.
IBM (NYSE: IBM) was once the powerhouse of the tech world. Not anymore, however. The advent of the personal computer began a long period of growing irrelevance for Big Blue. In 2016, its failed revitalization made most investors forget about IBM altogether.
Although it is still far from its status as a powerhouse, a ray of hope is beginning to shine. Under the relatively new leadership of CEO Arvind Krishna and armed with its 2019 acquisition of cloud computing specialist Red Hat (not to mention last year’s spin-off of its managed infrastructure business), IBM is restarting. On a constant currency basis, total revenue last quarter increased 11% year-over-year, driven by a combination of growth in its software, hybrid and consulting operations.
The company does not believe this pace will persist. Its forecast calls for sales growth “in the high mid-single digit range” for the remainder of 2022. Analysts collectively (albeit conservatively) peg that growth at 6.2%.
Even at the low end of the likely growth scenarios, however, a small increase in revenue translates into an even stronger increase in net income. This year’s free cash flow forecast of $10 billion to $10.5 billion is much better than the impact-adjusted free cash flow of $7.9 billion last year.
Simply put, Krishna’s prioritization of IBM’s hybrid cloud computing capabilities is the right move. Last week’s 10% post-earnings rise suggests the market has not priced this stock appropriately.
While the pandemic has focused on pharmaceutical companies developing vaccines aimed at curbing the virus, it has done so at the expense of other pharmaceutical names with little involvement in the effort. Merck (NYSE: MRK) was one of those names.
Its shares are more or less at the price they were just before the coronavirus started spreading across the world, and that’s only thanks to its 15% rise from February lows. Without this bullish bump, Merck would be one of the few names still in the red for the two-year period.
The thing is, like IBM’s recent uptrend, Merck’s recent gains are likely just a taste of what’s to come.
During the pandemic, it is largely forgotten that the need for other drugs and medicines has never gone away. And Merck has many of these treatments in its portfolio. They include cancer blockbuster Keytruda, diabetes drug Januvia, HPV vaccine Gardasil, and a host of other prescription drugs the world needs but hardly thinks about.
Indeed, Keytruda is currently being tested in eight trials that could significantly expand the commercialization of this already proven oncology therapy, promising to add even more to the drug’s $17.2 billion in sales last year.
Some analysts believe the company is too dependent on Keytruda, which accounts for around a third of its business. And the concern is not entirely unfair. But CEO Rob Davis said on last quarter’s conference call: “We have an expanding pipeline of commercial and development assets in oncology beyond Keytruda, which offer significant growth opportunities beyond 2028. .”
He added, “We have many important franchises beyond oncology that we believe can deliver sustainable growth over the next decade, including Gardasil, which we believe can potentially double by 2030.” The recent acquisitions of Acceleron Pharma and Pandion Therapeutics underscore another element of the company’s survival strategy; what it doesn’t have in its pipeline or portfolio, it can buy.
In short, there’s enough in the works to at least continue to support Merck’s dividend, which currently yields 3.2%.
Finally, add Goldman Sachs (NYSE:GS) to your list of stocks expected to skyrocket in the second half of this year.
Investors who watch capital markets closely might frown upon this assertion. Consulting firm EY recently noted that the number of initial public offerings (IPOs) made in the first quarter fell 37% year-on-year and that the total amount of funds raised in the first quarter had fallen by 51%.
This is alarming given that investment banking is one of the company’s main revenue drivers, while related ancillary operations make up another large portion of Goldman’s revenue. This alarm is underscored by the fact that Goldman Sachs’ first-quarter revenue fell 27%, cutting profits by more than 40%.
What the headlines don’t emphasize enough, however, is that the whole of 2021 (and the fourth quarter in particular) set the bar abnormally high for 2022 comparisons. EY also points out that the first quarter of the Last year was a record for public offerings, while the fourth quarter of 2021 was also the largest and busiest fourth quarter for capital markets since 2007.
Of course, Goldman Sachs will face tough comparisons for the rest of the year. Fundraising activity is not dead, however, despite what the stock’s 24% drop from November’s peak implies. Investors should start to understand this sooner or later. The forward P/E ratio of 8.2 means this is a buying opportunity in the range.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Goldman Sachs. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.