Although the S&P 500 is at all-time highs, some stocks have lagged significantly. For instance, we have seen bifurcation among the Magnificent Seven, with underperformance from Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL). Even among the best Dow stocks, there are some laggards with favorable risk-reward profiles.
But why pick the laggards? Chasing momentum might seem irresistible for now. But remember, some stocks hitting highs have frothy valuations. In case the market experiences a correction, they could see a swift and deep drawdown. Instead, the more prudent approach is to look at laggards for a potential catchup trade.
The markets have repriced these Dow stocks lower due to their idiosyncratic issues. As the markets have marched higher, these stocks have been stragglers, underperforming their sectors year to date (YTD). However, their challenges are fixable and don’t negate the long-term thesis for these stocks.
When these Dow stocks resolve their issues or the markets get clarity, they will roar back. The time to buy them is today when the market is overestimating their problems, hence severely punishing stock prices. These Dow stocks have a history of surmounting challenges and will bounce back.
Apple (AAPL)
For several reasons, former market darling Apple has fallen out of favor with the market. Currently, the stock is down over 6% YTD.
Some of the negativity on AAPL stock has been justified. First, the company has been an idler in AI. While fellow technology giants such as Microsoft (NASDAQ:MSFT) tout their AI investments and products, Apple has had nothing to show the market. Secondly, the slump in China sales, where the company has dropped from second to fourth place, has heightened the doom and gloom.
However, these issues are solvable, making Apple one of the top Dow stocks to buy. Regarding AI, the company has already embedded the technology in products such as Siri and Photos. Besides, at its Worldwide Developers Conference (WWDC) in June, it could unveil more features.
Analysts expect Apple to announce AI products running on its large language model. They also think integrating AI features in iOS 18 could spur a refresh cycle. Indeed, that’s highly possible since most consumers haven’t purchased a new iPhone in over four years.
Apple trades at a forward price-to-sales ratio of 6 compared to Nvidia’s (NASDAQ:NVDA) 17. Besides, it has over six times the revenue and three times the net income of Nvidia. Yet, its market cap is only 1.2 times that of Nvidia. Apple is one of the most underappreciated Dow stocks. Its AI launch at WWDC will be the catalyst that will push the stock higher.
UnitedHealth (UNH)
UnitedHealth (NYSE:UNH) is another stock that has faltered recently. However, don’t count out this long-term compounder yet. Its problems are temporary and it will rebound as soon as they are fixed.
Three negative news items have hit the company in quick succession this year. First, managed care peer Humana (NYSE:HUM) issued a bleak outlook, citing rising medical loss ratios as more Americans undergo procedures delayed during the pandemic. Secondly, the company experienced a cyber-attack on its subsidiary, Change Healthcare. And recently, the Department of Justice launched an antitrust investigation.
These negative headlines, plus the usual election cycle negativity against insurance providers and pharmacy benefit managers, have had investors rushing for the exits. Although the antitrust investigation could pose a risk, it is manageable.
The issue of rising medical losses due to increased procedures is easily addressable. Certainly, the company has the latitude to increase premiums to cover these losses if medical costs keep rising. Also, investors always sell the stock early in an election year, anticipating heavy criticism and threats towards its pharmacy benefits business. However, the stock quickly rebounds since the political chatter rarely leads to adverse policy.
UnitedHealth has been one of the top Dow stocks in terms of long-term compounding. The stock is well-positioned in this regard due to the secular tailwinds supporting healthcare spending. At 15 times forward earnings, the stock is a bargain.
3M (MMM)
Any progress in 3M (NYSE:MMM) stock has been hampered by the hanging cloud of litigation. The company faces two serious suits – ear plug and perfluoroalkyl and polyfluoroalkyl substances (PFAS). These litigations have been an overhang due to the unknown extent of the fines and penalties.
Still, 3M is one of the best Dow stocks to buy today. This dividend aristocrat has survived worse events in the past, like the Great Financial Crisis. Indeed, it is currently the second-longest member of the Dow, having joined the index in 1976.
From an investment standpoint, MMM stock is a long-term buy. The company is working to address its legal liability issues. Last year, it reached a $6 billion settlement on the earplug case and has started issuing payments to U.S. military service members and veterans. Secondly, it has received pre-approval for its $10.3 billion settlement to resolve its PFAS liabilities.
Also, the company has announced plans to spin off its healthcare business to unlock value and pay the settlements. On March 8, the company announced that the board had approved the spinoff. The new healthcare business, Solventum, will start trading on the New York Stock Exchange on April 1.
Also, the company has injected fresh blood to aid in the turnaround. It has appointed former L3 Harris CEO Bill Brown to lead the company during this transition period. MMM is one of the most undervalued Dow stocks to buy. Expect the stock to soar as the litigation issues wind down and the turnaround takes shape.
On the date of publication, Charles Munyi did not hold (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.
