2 Cheap Dow Jones Stocks to Buy Hand Over Fist, and 1 to Avoid

The Dow Jones Industrial Average has tumbled nearly 16% this year in reaction to recession fears and rising interest rates. Some stocks in the 30-company index have fallen by even more. For long-term investors, that presents an opportunity as the stocks that make up the DJIA are often described as blue chip stocks and offer great opportunities to also be described as long-term winners. Unfortunately, there are also a few that deserve hard passes.

Let's take a closer look at two Dow Jones stocks that are worth a closer look and one that is probably better avoided right now.

One to buy: Apple keeps getting more profitable

The release of the iPhone 14 could make Apple (NASDAQ: AAPL) more profitable than it already is. Apple enthusiasts may have noticed a subtle change to the iPhone 14 mix from previous models. This year's versions include two Pro versions (Pro and Pro Max) and no iPhone Mini. The main benefits of the Pro versions are the robust cameras and faster processors, and those features require more memory to operate. The additional memory in the Pro versions is cheap. Since the upgraded versions carry a much higher price tag, they're much more profitable smartphones than versions with less memory. Apple captures a 90% gross margin on the price difference between the Pro versions and versions with less memory.

After Apple introduced the Pro models in 2019, the gross margin that Apple reaped from its product segment reached 37%, its highest mark since Apple disclosed such data in 2018. Since the iPhone makes up the bulk of Apple's revenue, every percentage point of margin increase impacts its bottom line significantly.

This could be one of the reasons why Warren Buffett said Apple is probably the best company in the world that he knows. The legendary investor is known for buying stocks of great companies when they get cheap. He bought chunks of the stock in the first two quarters of the year for his company, Berkshire Hathaway. Investors looking to buy in now might be pleased to know that the stock has fallen over the last month to around the same price Buffett bought it at earlier this year. If the stock is cheap enough for the Oracle of Omaha to buy, investors should take note. They would also be wise to make Apple a core holding in their portfolios.

Another to buy: Salesforce can grow faster than the cloud industry

Outside of energy, cloud computing seems to be one of the remaining sectors seeing widespread growth this year. Unlike energy companies, though, cloud companies' stock prices cratered in 2022. This price dip could be a huge opportunity for savvy long-term investors, especially when you consider industry forecasts call for the cloud computing market to grow at a 17.4% annual clip through 2030.

Cloud giant Salesforce (NYSE: CRM) is best known for its wildly popular Customer Relationship Management (CRM) software, which gives its customer's sales teams cloud-based collaboration and marketing tools to strengthen customer relationships and expand sales opportunities. Perhaps more compelling to investors is Salesforce's acquisition strategy, which includes acquiring up-and-coming cloud-based collaboration companies, integrating them into the company, and quickly scaling them up.

For instance, Salesforce bought MuleSoft in May of 2018. MuleSoft generated $227 million of revenue at the time of acquisition, and Salesforce rapidly grew its annual revenue by 499% to $1.7 billion. More impressively, the company rolled up ExactTarget in July of 2013 and increased its revenue by 949%, from $286 million to $3 billion. Salesforce plans to do the same with its 2019 acquisition of Tableau and 2021 buyout of Slack. Its acquisition strategy combined with its unique CRM platform should put it in a great position to grow its business faster than the cloud industry forecast.

There are growing concerns that the slowing economy will also slow the growth in cloud computing, which may be why the stock is down this year. But Salesforce still managed to grow its fiscal 2023 second-quarter (ended July 31) revenue to $7.72 billion on a constant currency basis (after adjusting for currency fluctuations), a 26% year-over-year jump. That comes on the heels of 26% year-over-year revenue growth in the first quarter.

Though Salesforce's stock price is off over 40% this year, its long-term growth story remains intact. Wall Street analysts forecast the company will grow its earnings per share by 220% to $4.74 in fiscal 2023 (ending Jan. 31, 2023). That implies a forward price-to-earnings ratio of 31, which is significantly cheaper than it's been in over a year. Growth investors excited by the cloud computing should be adding Salesforce stock to their portfolios.

CRM PE Ratio (Forward) Chart

CRM PE Ratio (Forward) data by YCharts

One to avoid: 3M faces multiple monster legal liabilities

3M (NYSE: MMM) has long been an industrial juggernaut. The company has a storied history and is known for Scotch tape, Post-It notes, and produces hundreds of other industrial, electronics, and healthcare products. But a couple of those products have gotten 3M in hot water recently.

The company is embroiled in a legal battle with plaintiffs in New York who are accusing 3M and other companies of contaminating drinking water with toxic chemicals. The defendants recently settled one suit with a small New York town that manages the water, but additional civil claims are expected. One environmental lawyer said the settlement was the tip of the iceberg, and settlements from other claims will likely cost 3M billions of dollars.

3M is also facing legal settlements from veterans who claim they suffered hearing loss from earplugs the company sold to the U.S. military. The company has already settled with some individual veterans who were awarded damages that averaged $26 million each. The 3M subsidiary responsible for the earplugs filed for Chapter 11 bankruptcy protection, but a judge denied a motion to move the case to bankruptcy court. With over 230,000 more veterans who have filed similar claims, 3M is likely to be hit with additional mammoth liability.

3M's courtroom troubles may already be reflected in the stock's 35% tumble this year, but both of these issues still have considerable uncertainty and could worsen. 3M has set aside $1 billion to a trust for potential earplug settlements, but total settlements could far exceed the trust deposit. That's before accounting for the contaminated drinking water suit. Until investors have a clearer view of the end result of these cases, they'll want to avoid 3M stock.

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BJ Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway (B shares), and Salesforce, Inc. The Motley Fool recommends 3M and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. 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.


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