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3 Great Dow Stocks That Are a No-Brainer to Buy in the Second Half of 2024

Among the 30 proven components of the Dow Jones Industrial Average, there are three that currently stand out as phenomenal buying opportunities.

For 128 years, the iconic Dow Jones Industrial Average (^DJI 1.09%) served as the main health barometer for Wall Street. What began as a 12-stock index containing mostly industrial companies has morphed into a 30-component index made up of proven, multinational companies that have delivered consistently good results to investors over the long term.

While most Dow Jones stocks do not match the growth potential of innovative giants such as NVIDIA And Broadcommany are well positioned to make their shareholders richer over time. As we approach the second half of 2024, three great companies among the 30 components of the Dow stand out as clear buys.

A large American flag hangs over the New York Stock Exchange, with the Wall Street sign visible in the foreground.

Image source: Getty Images.

Coke

The first amazing Dow stock that opportunistic investors can confidently add to their portfolio for the second half of 2024 is none other than the beverage giant Coke (KO 0.22%).

Perhaps the biggest concern for stocks of consumer goods companies like Coca-Cola is the negative impact of above-average inflation on purchasing power. Persistently high housing costs have inadvertently pushed up the U.S. core inflation rate. If consumers have less disposable income to spend, it could lead to a recession and poor short-term operating results for consumer-facing companies.

The good news for Coca-Cola is that the company sells a staple. No matter how good or bad the U.S. or global economy is doing, consumers will buy drinks. It just so happens that Coca-Cola has over two dozen brands worldwide that generate annual sales of at least a billion dollars.

In addition, Coca-Cola’s geographic diversity is a competitive advantage that virtually no other consumer goods company can offer. The company operates in every other country except Cuba, North Korea and Russia. This results in predictable operating cash flow in developed markets and tremendous organic growth in emerging markets.

Another key catalyst for Coca-Cola is branding. Kantar’s annual Brand Footprint report finds that Coca-Cola was the most chosen brand by consumers in retail for the 12th year in a row. This is a testament to the company’s world-class marketing and further proof that staples can thrive in virtually any economic climate.

The company has agreed to use digital media advertising and artificial intelligence (AI) to tailor its message(s) to a younger audience. Coca-Cola can draw on over a century of history to continually appeal to its adult consumers.

While Coca-Cola won’t blow you away from a growth perspective, its business is transparent and predictable. Moreover, its price-to-earnings (P/E) ratio of less than 21 is an 11% discount to its average earnings multiple over the past five years.

A pharmaceutical laboratory technician uses a multiple pipette device to dispense a red liquid into a series of test tubes.

Image source: Getty Images.

Johnson & Johnson

A second great Dow stock that is a no-brainer for investors’ portfolios for the second half of 2024 (and probably beyond) is the healthcare conglomerate Johnson & Johnson (JNJ 1.62%).

“J&J,” as Johnson & Johnson is commonly known, has been significantly overshadowed by the current bull market. The clear reason for the weak performance almost certainly has to do with open litigation regarding the now-discontinued talc-based baby powder.

About 100,000 lawsuits allege that J&J’s talcum powder causes cancer. Two previous attempts by J&J to settle this class action lawsuit were dismissed in court.

Although Wall Street and investors abhor legal uncertainty, it is important to recognize that Johnson & Johnson has the financial resources to fund an eventual settlement. It is one of only two publicly traded companies awarded the highest possible credit rating (AAA) by Standard & Poor’s. J&J’s ample operating cash flow and cash on hand will more than cover any potential financial burden.

The fuel behind Johnson & Johnson’s steady earnings growth is its pharmaceutical segment. Management has shifted its focus to this higher-growth and more lucrative business area for more than a decade. J&J invests heavily in novel research and has demonstrated a willingness to collaborate on potential blockbuster therapies.

In addition to its core pharmaceutical business, Johnson & Johnson has a world-leading medical device segment. While medical technology has become a commodity to some extent, the aging population at home and abroad and improved access to preventive medical care are likely to act as a long-term catalyst for this segment.

Another reason why potential investors can trust J&J to live up to their expectations is the continuity in its leadership team. Since its founding 138 years ago, J&J has had only 10 CEOs, including current boss Joaquin Duato. The minimal turnover at the top means that the company’s various growth initiatives are properly overseen from start to finish.

Like Coca-Cola, Johnson & Johnson stock is historically cheap. Based on Wall Street’s consensus estimate for earnings per share (EPS) for 2025, J&J trades at a P/E of 13.6, a 15% discount to the average P/E over the past five years.

Amazon

The third great stock in the Dow Jones Industrial Average that is a no-brainer to buy in the second half of 2024 is the e-commerce behemoth Amazon (AMZN 0.23%).

The most obvious headwind for current and prospective Amazon investors is the likelihood of a U.S. recession in the not-too-distant future. Although U.S. economic data has remained relatively strong, certain forecast indicators, such as the first significant decline in U.S. M2 money supply since the Great Depression, point to impending trouble for the economy. Since Amazon derives a large portion of its revenue from its online marketplace, some investors believe a recession would weigh heavily on its stock.

While recessions can be scary, it’s important to remember that they’re also short-lived. In the 78-plus years since the end of World War II, 9 out of 12 recessions in the U.S. were overcome in less than 12 months. That means consumer-facing companies like Amazon are far more likely to be standing in the proverbial sun than navigating choppy waters.

Moreover, Amazon’s operating cash flow has very little to do with its market-leading e-commerce segment. Although the online marketplace attracts nearly 2.5 billion people to the company’s website each month, Amazon’s ancillary businesses do most of the work.

No business unit is more important to Amazon’s long-term growth potential or cash flow generation than Amazon Web Services (AWS). As the world’s leading cloud infrastructure services platform (measured by spending), AWS currently generates over $100 billion in annual revenue.

What’s incredible about this revenue number is that spending on enterprise cloud services is still increasing. With cloud services margins far exceeding e-commerce margins, it should come as no surprise that AWS consistently accounts for 50 to 100 percent of Amazon’s quarterly operating profit.

Subscription and advertising services also contribute. The 2.5 billion visitors per month have strengthened Amazon’s pricing power in advertising. At the same time, Amazon has the exclusive rights to Football on Thursday eveningis a boon to the company’s Prime subscription, along with an extensive content library.

To top it off, Amazon, like Coca-Cola and Johnson & Johnson, is historically cheap. But while the traditional P/E ratio works well for valuing mature companies, it’s not particularly useful for fast-growing companies (like Amazon) that reinvest a significant portion of their cash flow. That’s why operating cash flow is such an important metric when valuing hypergrowth stocks.

Amazon is currently valued at 13.4 times Wall Street’s consensus cash flow forecast for the company in 2025. That’s a huge discount to the average cash flow multiple of 22.1 over the past five years and the median year-end multiple of 30 that investors were happy to pay to own Amazon stock in the 2010s.

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