August was not good for the 30 Dow Jones Industrial Average stocks. Dow market leaders performed poorly, with just 12 in positive territory on Aug. 31.
However, even though the index lost 2.6% throughout the past month, it could have been much worse without a recent four-day streak in positive territory. Interestingly, as bad as it was, it was worse last August with the Dow losing 4.1%.
The best performer this August was Amgen (NASDAQ:AMGN), up 10.8%, while the worst performer was Walgreens Boots Alliance (NASDAQ:WBA), down 14.6%.
I’ve been tasked with selecting the three must-own Dow stocks. This process shouldn’t be nearly as challenging, with only 30 to choose from compared to more than 500 for the Standards & Practives (S&P) 500. The two I’ve already mentioned are excluded from the selection. That leaves me with 28 possibilities. I’ll try to pick companies from three different sectors.
May the best Dow stocks win.
Caterpillar (CAT)
It shouldn’t be surprising that Caterpillar (NYSE:CAT) is the second-best performing stock in the Dow throughout the past three years, up 93%. It sells heavy equipment to companies in the energy and basic materials sectors. Those two have done well throughout the past 36 months.
I can remember the business media trashing CAT stock in March 2020. At the time, it traded for slightly more than $75. At the time, I called it one of the 10 best value stocks to own in 2020. It’s up 276% in the 41 months since. It’s 2.9 times greater than the S&P 500.
The good news about CAT is that it’s up nearly 18% year-to-date. The bad news is that it lost 2.5% of its value in August. Industrial stocks have taken a rest due to higher interest rates. Investors wonder how much growth will happen in this economic environment.
Here’s what investors do know: Caterpillar’s Machinery, Energy & Transportation (ME&T) free cash flow in the first six months of 2023 was $3.98 billion, 5.7 times the amount in 2022. The company’s annualized free cash flow of $7.96 billion is higher than it’s ever been.
From a valuation perspective, CAT is fair value today. You’ll want to hold it for two to three years to benefit from owning it, but this is one of the Dow market leaders that will be worth it.
Apple (AAPL)
Apple (NASDAQ:AAPL) lost nearly 4% in August despite a late-month rally that saw the iPhone maker’s stock rally almost 6% in the five final trading days.
Apple’s stock has had an exciting summer. The company’s market capitalization in late June went above $3 trillion. It held this level through July, but August brought it back to earth.
Regardless of what happens to the markets in the year’s final four months, every core portfolio of quality stocks starts and ends with Apple. I might disagree with its share repurchase policy, but you can’t make these kinds of capital allocation decisions in the first place if you don’t have the free cash flow. Apple has $101 billion [cash flow] as of June 30. That’s a whopping 26% of revenue.
Wedbush Securities analyst Dan Ives appeared on Bloomberg Surveillance on Aug. 31. He discussed Apple’s artificial intelligence (AI) plan. He believes AI could add $30-40 a share to its stock price just from AI alone. Further, he thinks it will hit a $4 billion market cap by February 2025. That’s an annualized growth of 24% based on getting to $4 billion in 18 months.
In addition, he suggested that 240 million of 1.2 billion iPhone owners haven’t upgraded their phones in four-plus years. That too will add revenue beyond what’s expected throughout the next couple of years.
It’s the number one stock in the Dow.
JPMorgan Chase (JPM)
Warren Buffett likes Bank of America (NYSE:BAC), and he’s rarely wrong. However, it’s hard not to like Jamie Dimon-led JPMorgan Chase (NYSE:JPM), and it’s in the Dow, BAC isn’t, so I’m going with JPM.
It was the third-worst performer of the 30 stocks in the Dow in August, down 6.9%. From March through July, the bank was having an excellent year, up 27% from trough to peak. Thanks to August, it’s now up 8.3% YTD.
JPMorgan’s CEO is never one to shy away from giving an opinion. In early August, after Fitch Ratings downgraded America’s long-term credit rating, he called the move “ridiculous,” suggesting that it makes no sense that the most prosperous nation on earth doesn’t have an AAA rating, but other countries do.
He’s got a point.
Analysts are generally optimistic about the bank’s stock. Of 26 that cover it, 19 rate it :Overweight” or an outright “Buy” (73% of the total), with a $169 target price. That compares to 50% of the total for Bank of America.
Why should you buy JPM?
Throughout the past 18 years, JPMorgan has increased its tangible book value per share from $15.35 in 2004 to $73.12 in 2022, a compound annual growth rate of 9.1%. Impressively, it’s risen in all 18 years.
Plus, the 2.7% dividend yield doesn’t hurt. This and the other Dow market leaders we mentioned are all worth of your investment.
On the date of publication, Will Ashworth 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.
