Despite a possible recession, these two Dow Jones stocks are still a buy.
The Dow Jones Industrial Average, a widely used barometer of the U.S. economy, is up 5.5% year to date. Despite this positive trend, the U.S. economy is exhibiting some alarming signs of tipping into a recession later this year. Specifically, the labor market has cooled, and unemployment has risen steadily over the past 12 months, according to the latest update from the U.S. Bureau of Labor Statistics.
While economic downturns typically prompt investors to take profits on large-cap U.S. stocks, Amazon (AMZN 4.40%) and Merck (MRK -0.24%), both Dow Jones components, remain compelling buys for long-term investors. Let’s examine why these two blue chip stocks stand out in this less-than-ideal investing environment.
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Amazon: An e-commerce giant with a diversified business
Amazon dominates the e-commerce landscape, leveraging its unrivaled scale to deliver a fast, efficient shopping experience. The company’s main competitive advantage is its vast network effect, a feature that reinforces customer loyalty and drives recurring, high-margin revenue from Amazon Prime memberships.
However, Amazon’s growth strategy isn’t limited to e-commerce. Two of its highest-margin segments, Amazon Web Services (AWS) and advertising, have demonstrated exceptionally robust demand in recent quarters. These key segments are less susceptible to economic slowdowns, providing a buffer against a potential recession.
Wall Street anticipates the company’s top line to rise by more than 10% in both 2024 and 2025, thanks largely to its AWS and advertising segments. The downside, though, is that Amazon and its double-digit revenue growth aren’t cheap, with shares trading at over 36 times forward earnings at the time of this writing.
To put this valuation metric into the proper context, the benchmark S&P 500 trades at around 21 times forward earnings at the moment. So, by comparison, shares are on the pricey side.
Still, Amazon’s entrenched competitive position, diverse revenue streams, and sizzling growth make its shares worth the price of admission.
A pharmaceutical powerhouse with a top-tier pipeline
Merck stands out in the pharmaceutical industry thanks to its market-leading cancer therapy Keytruda, along with its robust pipeline of potential blockbuster treatments. The drugmaker’s shares are attractively priced at just 14.2 times forward earnings, compared to the big-pharma peer group average of 17.
On top of its bargain-basement valuation, Merck offers a generous 2.7% annualized dividend yield, which is well supported by earnings, evinced by its payout ratio of only 56.3%.
Merck’s growth story is closely tied to Keytruda, which is set to lose patent protection in 2028. But according to Morningstar analyst Damien Conover, CFA®, recent approvals for earlier lines of therapy should support close to 10% annual growth over the next five years. Moreover, Merck is developing a potential subcutaneous formulation of Keytruda, which could effectively extend patent protection into the late 2030s.
The company is also bringing several new growth assets online. For instance, the recently launched rare-disease drug Winrevair and late-stage cancer treatment V940 both represent over $3 billion in commercial opportunities.
All told, Merck’s stock scans as undervalued relative to its growth potential over the next several years. Investors might want to load up on this top pharma stock while it trades at a sharp discount relative to its peer group.
Key takeaways
Amazon and Merck stand out as intriguing investment opportunities in the current market. Amazon’s wide economic moat and diversified business model should translate into healthy gains for long-term investors. The AWS and advertising segments also provide a buffer against economic uncertainty.
Merck, for its part, is a deeply undervalued pharma play with a generous dividend yield and an underappreciated pipeline.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Merck. The Motley Fool has a disclosure policy.
