When the U.S. Bureau of Economic Analysts posted real gross domestic product (GDP) growth of 2.6% on an annualized basis, stocks in the Dow Jones index rallied. Indeed, worries of a recession at this moment have been quashed by this impressive report, leading to strength in most Dow stocks relative to other sector such as tech, for example, of late.
That said, investors benefit from questioning the peculiarly strong report. Knowing which sectors did the heavy lifting with these GDP numbers is important. In this regard, investors may want to take caution with some Dow stocks, which have not been the stalwarts they used to.
U.S. GDP rose because the government increased its spending. Exports increased, driven by strong demand for U.S. energy. However, winter is coming. This will limit the country’s ability to send more energy products abroad. Conversely, a decrease in housing costs and lower imports over time signals ongoing weakness for consumer goods. Some of the strongest U.S. brands survived the starting phase of this economic decline. However, that luck may run out.
Inflation is raising the cost of nearly everything. This has not deterred customers from spending more on services, such as travel (yet). However, consumers increasingly will eventually need to offset the negative impact of lower disposable income. As a result, it’s widely expected that consumers will cut non-essential spending.
As consumers dip into their savings, these seven Dow stocks may best be avoided right now.
| BA | Boeing | $149.44 |
| GS | Goldman Sachs | $348.82 |
| HD | Home Depot | $295.45 |
| MMM | 3M | $124.78 |
| MSFT | Microsoft | $224.75 |
| NKE | Nike | $92.67 |
| WBA | Walgreens Boots Alliance | $36.36 |
Boeing (BA)
Starting off our list of Dow stocks to sell is the embattled aerospace company, Boeing (NYSE:BA). Indeed, Boeing is no longer the great company that it once was. After the company took years to resolve Boeing 787 safety issues, it resumed deliveries in the last quarter.
In the third quarter, Boeing delivered only nine 787 airplanes. The company lost $6.18 per share, largely due to fixed-price defense development programs. That said, Q3 is not the only quarter where Boeing booked a write-down. This is a company that’s been losing money for some time on specific parts of its business which should provide stability.
On Boeing’s recent conference call, the company tried to spin a positive outlook for this contract loss. Dave Calhoun, the company’s President and Chief Executive Officer said that Boeing will ultimately deliver products to the Air Force or the armed forces.
Like other company’s in the Dow, Boeing faced supply chain constraints in the quarter, with parts shortages persisting longer than expected. Labor instability in the sector has also had an impact on program deliveries.
The development of products like the MQ-25, an unmanned aircraft carrier, has had technical challenges. Expect BA stock to underperform the Dow Jones index as uncertainties continue.
Goldman Sachs (GS)
Goldman Sachs (NYSE:GS) reported revenue which declined by 12% year-over-year to $11.98 billion in the company’s third quarter. The financials giant faced challenging macroeconomic conditions, as did most in its sector. In fact, CEO David Solomon said that macro themes dominated his conversations with top executives.
In the company’s fourth quarter, Solomon sensed an ongoing, unsettled outlook. Markets dislike such uncertainties. Accordingly, while GS stock rallied from below $300 to trade above $340 for the week ended Oct. 28, many aren’t so sure this broad rebound in financial stocks can be maintained. For Goldman, specific difficulties related to the company’s private lending businesses have been the focal point of some bears. Additionally, in order for Goldman to keep grabbing market share from competition in the retail investor space, more capital spending may be required. Right now is not the right time for this, according to many investors.
Thus, I think buying a more diversified financials ETF such as the Financial Select Sector SPDR Fund (NYSE:XLF) could be the way to go. It appears it will take a few quarters before Goldman realizes any gains from its investments, making this stock a pass for me.
Home Depot (HD)
Home Depot (NYSE:HD) has added $40 billion worth of business to its books over the last two years alone. As it turns out, catering to the construction professionals and a do-it-yourself customer base has been very profitable, especially following a pandemic which saw nesting patterns emerge among many homeowners.
Strong engagement among its customer base has led to strong business growth. That said, HD stock faces pressure ahead as past tailwinds fade. Homeowners are less-inclined to invest in expensive home improvement projects as interest rates rise. Mortgage rates topped 7% recently, which will hurt demand for homes overall. And as home prices decline, the ROI on various projects dips, as well as the equity which many homeowners have used to pay for such home improvement projects.
Now, homes still need small repairs as they age. Indeed, small home upgrade projects like painting are ongoing revenue sources for Home Depot. However, the revenue potential from selling maintenance items is smaller than major renovation budgets. In addition, the pandemic between 2020-2021 encouraged customers to upgrade their outdoor space. Now that the U.S. is not adopting lockdowns or draconian measures, Home Depot customers will not spend as much as they once did.
3M (MMM)
Another company I’m focusing on as one of the top Dow stocks to sell is 3M (NYSE:MMM). That’s not because of the company’s consumer staples portfolio of products. Rather, it’s the company’s potentially massive liability related to its earplugs, which were sold to the U.S. military.
In August, the court ruled that 3M must face over 230,000 lawsuits. The company cannot use the bankruptcy of its subsidiary, Aearo Technologies LLC, to shield it from the case.
In the third quarter, revenue fell by 3.8% compared to last year’s total of $48.6 billion. It saw declines in its personal safety unit, much of which was tied to Covid-related products such as vaccines and therapeutics. Still, this unit benefited from strong demand in the Asia Pacific region. Business in China recovered after lockdowns eased in the second quarter. However, the recent lockdown in Wuhan suggests that 3M will report weaker results next quarter.
Although 3M posted stronger revenue from the Americas, its outlook is negative. It expects total sales will fall by up to 3.5% in 2022.
3M stopped disclosing pricing, as one analyst commented on the call. After giving fewer details to investors, the risks are high that this company cannot pass inflation pressures on to consumers.
Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) recently fell after posting strong results. The company earned a solid $2.35 a share on $50.1 billion in revenue. However, the market’s negative reaction pressured MSFT stock on Oct. 26. This suggests that investors don’t expect the software giant to exceed guidance the next quarter.
Trading at around 25-times price-to-earnings, Microsoft needs Azure, its cloud solution, to grow despite the weak macroeconomic environment. Investors are concerned that business customers will slow their digitization transformation. Small and mid-sized customers will likely slow their spending as well, as business growth lags.
Microsoft has a growing total addressable market for its infrastructure, data, and artificial intelligence offerings. In the long-term, the company’s revenue will expand. But in the current quarter, Microsoft should expect customers will delay their technology spending.
Microsoft 365 is a flagship productivity solution that is still appealing. Last quarter, the company relied less on discounts to drive growth. It also benefited from upselling its customers to E5, an enterprise solution. As corporations cut spending, this upsell rate could slow.
Nike (NKE)
Nike (NYSE:NKE) risks tied to elevated inventory levels have re-shaped the narrative on this stock, as consumers spend less on sporting goods. In the last quarter, Nike’s inventory grew by 44% year-over-year. That said, inventory growth outpaced top-line growth, surging by 65% in North America.
Nike has attractive products in its pipeline. For example, customers are likely to splurge on the Air Zoom Mercurial, Air Max Scorpion, and Nike Forward this holiday season. Despite falling this year, the stock’s high price-earnings ratio may have priced in those prospects.
Nike blamed disruptions that started over a year ago for the inventory glut. For example, factories in Vietnam closed for nearly 15 weeks. Transit times increased and are volatile. And while transit times have improved, inventories are rising as the company loaded up on too much product ahead of the holiday season.
So, does this mean more markdowns (and lower margins) are coming? I think that’s likely, and investors are taking a risk by holding NKE stock. Consumers may spend less during this holiday period than they have historically. Accordingly, with inflation hurting disposable income, pressure on consumers to avoid expensive items will pick up. Thus, Nike is a pass for me at this time.
Walgreens Boots Alliance (WBA)
Rounding out our list of Dow stocks to sell is Walgreens Boots Alliance (NASDAQ:WBA), a drugstore company that’s increasingly scaling its U.S. healthcare business. This move is expected to strengthen its long-term sales prospects through its fiscal 2024 year.
To meet its business plan, the drugstore must simplify its business structure. This optimization is aimed at achieving organic growth. That said, investors may view this goal differently. The company’s core business is slowing, so Walgreens may need to increase capital spending, which could result in cash flow declines for this company.
On Oct. 11, the company acquired CareCentrix, acquiring the remaining 45% stake in this company for around $392 million. Although CareCentrix is a leader in the $75 billion post-acute and home care industry, the purchase increases investor risk. Walgreens will only achieve margins in the high single-digit percentage range, at best, given its previous struggles with VillageMD. This acquisition was a much larger one, worth $5.2 billion, in 2021.
Investors are justifiably wary that Walgreens management will achieve EBITDA growth from those two acquisitions. Thus, WBA stock fell to $30.39 in October, and I think this stock has more room to fall from here.
On the date of publication, Chris Lau 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.