Is It Time to Buy the Dow Jones' 3 Worst-Performing Stocks This Year?

The Dow Jones Industrial Average (^DJI) has been a mixed bag in 2023. Among the 30 component stocks, 13 have posted a price gain year to date, while the 17 remaining stocks are down instead. The Dow’s top performer this year is business software giant Salesforce (CRM 0.54%), up 45% since the new year thanks to an impressive fourth-quarter earnings report.

At the other end of the spectrum, seven of the Dow’s household names have taken 2023 haircuts of 10% or more. At the bottom end of this pool, I’m talking about this trio of familiar names:

Data source: Finviz.com numbers on Tuesday, March 28. YTD = year-to-date.

In this situation, savvy investors everywhere want to know one thing: Is it time to double down on the Dow’s three deepest downers today?

Let’s find out.

1. 3M’s perfect storm of business risks

3M faces a difficult year ahead. The sector-crossing giant of healthcare, consumer goods, industrial materials, and worker safety equipment is navigating through a perfect storm of business risks — some from global market conditions and others of the company’s own making.

Some stock price discounts can be a go-ahead signal to pick up shares of a high-quality company at a low price. Unfortunately, I don’t see a wide-open buying window for 3M today. The company is up against too many game-changing challenges all at once, including:

• Challenging financials: 3M’s financial expectations for 2023 show a decrease in sales growth and lower earnings per share than market analysts predicted. This might raise concerns about the company’s ability to maintain its six-decade streak of uninterrupted annual dividend increases.
• Litigation issues: 3M is dealing with several legal battles, including those related to PFAS (a fluoride-based group of artificial chemicals used for waterproofing, protective coating, and more) and ear protection litigation. These lawsuits cost the company over $1 billion in 2021 and 2022, and the expenses are likely to continue.
• Restructuring and divestitures: The company plans to spin off its healthcare business and is also discontinuing PFAS manufacturing by the end of 2025. Though these decisions may be good for 3M and shareholders in the long run, they could also result in more pretax charges and expenses, adding more uncertainty to the company’s more immediate financial outlook.
• Stock valuation: Although 3M currently trades at a modest 10 times adjusted earnings, its free cash flow multiple is a staggering 118 times. In other words, 3M looks affordable in relation to its solid after-tax income but expensive in light of its dwindling cash profits. The stock’s true value is up in the air until 3M can settle its financial struggles.
• Potential dividend risk: Given the many headwinds 3M is tackling simultaneously, investors worry that the company’s long streak of annual dividend increases may come to an end. In fact, 3M may have to reduce or even halt its dividend payments, using the cash to shore up other leaks in the business structure instead. For those relying on dividends for income, this risk could be especially disturbing. Many investors flock to 3M’s generous payouts, after all. At the moment, you’re looking at a massive annual dividend yield of 5.9%.

So 3M’s stock is quite cheap, in a certain angle and a certain light, but arguably for good reasons. This is one dog of the Dow I wouldn’t recommend adopting today.

2. Take it easy with Johnson & Johnson

Moving on to healthcare titan Johnson & Johnson, some themes sound familiar:

• Like 3M, Johnson & Johnson is separating from its consumer-oriented operations this year.
• The two behemoths also share some legal trouble. This time, a settlement of 10,000 baby powder lawsuits three years ago has now ballooned into 38,000 cases as the lawsuit process is moving again.
• Furthermore, Johnson & Johnson also comes with a modest price-to-earnings ratio but a sky-high cash flow valuation.

However, I have fewer concerns about Johnson & Johnson’s future compared to 3M’s.

When Johnson & Johnson completes its consumer healthcare spinoff, its remaining operations fall in the twin high-growth markets of medical devices and pharmaceutical treatments. Thanks to a star team of expected high-performing products in areas like cancer treatment, immunotherapies, and the recently acquired Abiomed’s heart pumps, Johnson & Johnson’s top line should accelerate over the next few years.

Now, Johnson & Johnson still doesn’t strike me as a no-brainer buy in this moderate share price dip. There are too many balls in the air, and that baby powder lawsuit could end up costing more than $10 billion. I won’t make any serious investment in this stock until the dust settles around Johnson & Johnson’s potentially costly courtroom battle.

3. Honeywell plays a different tune

The run of eerily similar business stories ends with industrial powerhouse Honeywell.

This company is not spinning off any of its business operations and does not face lawsuits of a potentially game-changing scale. Instead, its swooning stock chart followed after a mixed earnings report with downbeat projections for the rest of the year.

Unsold inventories are piling up in some warehouses, and many customers are dragging out their agreed payments. Hamstrung by supply chain slowdowns, inflation-driven order softness, and unfortunate weather patterns last year, Honeywell sees most of these headwinds carrying on in 2023 as well.

At the same time, Honeywell sports a historically high order backlog worth $30 billion and robust bottom-line profits — both as Uncle Sam counts them after taking his share and as the cold, hard dollar bill flies.

Compared to Johnson & Johnson and 3M, Honeywell appears to be a more promising investment option, given its solid order backlog and strong bottom-line profits. Despite its challenges, Honeywell’s financial health seems to be on more solid footing than its low-priced Dow peers.

However, none of these dogs of the Dow appear to be fantastic buys at the moment, with plenty of more promising investment ideas available in other corners of the current market. In these uncertain times, it’s perfectly fine for investors to leave the dogs alone and go for better options elsewhere.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce. The Motley Fool recommends 3M and Johnson & Johnson. The Motley Fool has a disclosure policy.