Is it too late to buy the 3 best performing August stocks in the Dow Jones?
The Dow Jones Industrial Index is often considered a barometer of the largest US industrial stocks. This month, the index underwent a shake-up, with three new additions replacing three other long-standing pillars of the index. Entering the index are salesforce.com (NYSE: CRM), Amgen, and Honeywell, while ExxonMobil, Pfizer, and Raytheon got out.
Apple‘s (NASDAQ: AAPL) The 4-to-1 division prompted the movement. Because the index is a price-weighted index, not a market-cap weighted index, the stock split reduces both Apple’s weighting and that of the market. technology sector within the Dow Jones. According to S&P, the addition of Salesforce in particular would help maintain the technology weighting to “help diversify the index by removing overlaps between companies of the same size and adding new types of companies that better reflect the US economy. “.
The Dow Jones is also having a great August – in fact, it’s the Dow Jones’ best August since 1984. And among the top performers were both Salesforce, Apple, and the aforementioned powerhouse. Nike (NYSE: NKE). But after their stellar month, should you buy those star brand stocks today or look elsewhere for better value?
Salesforce was a monster in August, up almost 40%. Part of that gain came from the enthusiasm that it would be added to the prestigious Dow Jones and that a wave of “forced buyers” would enter the stock. However, Salesforce also earned its stripes with a practical victory on August 25. Revenue increased by 29% and adjusted (noGAAP) earnings per share were $ 1.44, both well ahead of analyst expectations.
It appears that Salesforce’s portfolio of digital transformation apps is still in demand during the pandemic, and the demand may even have accelerated. The company also touted the victories of the public sector, such as in the state of Rhode Island, which needed to set up a command center quickly amid COVID-19. The company has also raised its guidance for fiscal 2021, ending in January, to a range of $ 20.7 billion to $ 20.8 billion in revenue, a growth of about 21 to 22 percent, with adjusted EPS of $ 3.72 to $ 3.74, up from previous forecast of $ 2.93 to $ 2.95.
However, investors should be aware that this adjusted earnings figure does not include stock-based compensation, which the company says will total $ 2.35 per share this year, or more than half of that earnings. Additionally, I have never owned Salesforce due to its reliance on inorganic growth. Of course, that was a mistake, as Salesforce has done pretty well in recent years. The seemingly sky-high valuations it pays for companies like Tableau and Mulesoft appear to be justified by the astronomical rise of the tech sector this year. However, investors should be aware that this is the last quarter that Salesforce will benefit from the further increase in growth from Tableau, which the company bought last year on August 1. On an organic basis, Salesforce predicts approximately 14% overall growth in its end markets. over the next five years.
Trading at around 70 times the expected non-GAAP EPS this year – a figure that even overstates earnings, due to stock-based compensation – Salesforce is a bit too expensive for me after its massive run in August. However, it is certainly a good company leading digital transformation around the world, so investors should keep it on the watch list for any major setbacks.
Not to be outdone, Apple (NASDAQ: AAPL) was Dow’s second-best-performing stock in August, up 21.4%. I’d be careful with Apple even after the massive sales last week, which only returned some of those massive gains. The August run came after Apple had already had a great year, and the stock was up 75% through August 31. This last leg of the journey seems to have come in anticipation of the stock split, which occurred on August 31 and was announced during the company’s second quarter earnings release.
Investors should know that when a company splits its stock, it is not adding or subtracting its intrinsic value at all. Some may believe that a lower stock price will attract a new wave of retail investors who can afford the cheaper stocks, but most online brokerages now offer fractional share purchase In any event.
It’s probably not a coincidence that CEO Tim Cook recently sold the entire stock award he just received for his performance as CEO just before the stock split, earning him around 131 , $ 7 million. Sure, Cook still owns a lot more stock and will receive another stock award next year, but selling all of that stake is still a good part of the change.
I think Apple is a great company that investors should own for the long term, but today’s valuation feels a bit stretched to about 31 times the projected earnings of 2021. So long term investors probably should. just hold on to their shares, while buyers may want to wait for a better entry price.
Giant sneakers and sportswear Nike (NYSE: NKE) August also posted a strong August, as the stock rose about 14.6% for the month. Although the company released disappointing figures for its last quarter of June, investors were apparently encouraged by the prospect of a second round of stimulus, as well as the prospect of sports and leisure wear as the trend in home work continues. As a leading brand in this trend, Nike also offers direct deals to leading consumers, who can leverage its brand and financial strength.
During August, no financial news came from the company, but the shoe retailer Walk-in locker (NYSE: FL) released better numbers than feared which also helped Nike by association. Additionally, Nike has announced a partnership with top NFL stars to create a free sports training tool called 11-Online, which may have garnered a bit more excitement.
Like many other well-known brands, Nike increased in August, but like these other brands, its stock is expensive. The stock is currently trading at 70 times earnings and 49 times next year’s earnings. Even going back to the pre-pandemic 2019 period, the stock is trading around 45 times 2019 earnings. Analysts expect growth to return in 2022, but Nike’s current price is still around 34 times. that of the 2022 estimates.
It seems a bit overpriced to me at the moment, although I like Nike in the longer term. Additionally, a second stimulus bill appeared to stagnate in Congress, so the resumption of sales after a new round could prove elusive.
A common theme
Without a doubt, Salesforce, Apple and Nike are high quality companies, but each was bid up to very high valuations in August. As such, each is off limits for me right now, although investors should be looking to pick one of these names if we get another market sell-off.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.