Dow Stock Up 17%, Buy Or Wait?

Dow (DOW) stock is up 16.7% in 5 trading days. Already own the stock? Might want to consider booking some profit as there is risk – specific to growth, profitability, balance sheet and downturn resilience. Consider the following data:

• Size: Dow is a $18 Bil company with $41 Bil in revenue currently trading at $25.38.
• Fundamentals: Last 12 month revenue growth of -5.3% and operating margin of 1.2%.
• Liquidity: Has Debt to Equity ratio of 1.09 and Cash to Assets ratio of 0.08
• Valuation: Dow stock is currently trading at P/E multiple of -15.9 and P/EBIT multiple of 153.1
• Has returned (median) 59.7% within a year following sharp dips since 2010. See DOW Dip Buy Analysis.

While we like to ride the momentum if the fundamentals check out – for DOW, see Buy or Sell DOW Stock – we are wary of bull traps. Specifically, it is worth trying to answer if things get really bad, and DOW drops 20-30% to $18 levels, will we be able to hold on to the stock? What is the worst case scenario? We call it downturn resilience. Turns out, the stock has fared much worse than the S&P 500 index during various economic downturns. We assess this based on both (a) how much the stock fell and, (b) how quickly it recovered.

A single stock can be risky, but there is a huge value to a broader, diversified approach. Should you buy one stock you like or build a portfolio designed to win across cycles? Our numbers show that the Trefis High Quality Portfolio has turned stock-picking uncertainty into market-beating consistency. This portfolio is incorporated in the asset allocation strategy of Empirical Asset Management — a Boston area wealth manager and Trefis partner — whose asset allocation framework yielded positive returns during the 2008-09 period when the S&P lost more than 40%.

Below are the details, but before that, as a quick background: DOW provides advanced materials science solutions across packaging, infrastructure, coatings, and consumer care markets globally, including specialty plastics, industrial intermediates, performance materials, and insurance services.

2022 Inflation Shock

• DOW stock fell 38.5% from a high of $70.61 on 4 May 2022 to $43.39 on 26 September 2022 vs. a peak-to-trough decline of 25.4% for the S&P 500.
• The stock is yet to recover to its pre-Crisis high
• The highest the stock has reached since then is $60.51 on 7 February 2023 , and currently trades at $25.38

 
2020 Covid Pandemic

• DOW stock fell 59.8% from a high of $54.73 on 1 January 2020 to $22.00 on 16 March 2020 vs. a peak-to-trough decline of 33.9% for the S&P 500.
• However, the stock fully recovered to its pre-Crisis peak by 18 November 2020

 
2018 Correction

• DOW stock fell 38.9% from a high of $66.65 on 31 August 2017 to $40.71 on 23 August 2019 vs. a peak-to-trough decline of 19.8% for the S&P 500.
• However, the stock fully recovered to its pre-Crisis peak by 5 May 2021

 
2008 Global Financial Crisis

• DOW stock fell 86.7% from a high of $47.67 on 19 July 2007 to $6.33 on 9 March 2009 vs. a peak-to-trough decline of 56.8% for the S&P 500.
• However, the stock fully recovered to its pre-Crisis peak by 26 February 2014

 
It is a good thing to keep in mind how low DOW could go during a downturn. And you should also check how the stock fared when compared with the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 — the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.