The Dow Jones Industrial Average tracks 30 of some of the strongest companies in the world, but if you're looking for stocks that can outperform the market averages, you're in the right place.
Over the last three decades, the Dow Jones has delivered a compound annual return of 11%. Here are three Dow Jones stocks that have a great chance of outperforming that return in the coming years.
1. Amazon
Since bottoming out in the 2022 sell-off, Amazon(NASDAQ: AMZN) has been on a tear. While the stock has pulled back from recent highs over the last month, the accelerating growth in cloud services and improving profitability are good reasons to buy the dip.
Sales from Amazon's retail business decelerated last quarter, which shows that it is not immune to macroeconomic headwinds hurting consumer spending right now. But Amazon will continue to see its online retail business grow much larger over the next 10 years given the growing multitrillion-dollar global e-commerce market.
Most importantly, Amazon's cloud computing business drives two-thirds of its operating profit, and it continues to look strong. Revenue from Amazon Web Services grew 19% year over year in the second quarter. The long-term tailwinds supporting investment in cloud infrastructure and artificial intelligence (AI) services by enterprises bode well for cloud demand, and therefore Amazon's long-term prospects.
Overall, Amazon's net profit doubled over the year-ago quarter to $13.5 billion, as management continues to focus on lowering costs in the retail business. The stock's forward price-to-earnings (P/E) ratio is 36, which is down from over 50 a year ago, which means all of the stock's gains this year were driven by growth in the company's profits.
Amazon's opportunities in lowering costs and growing its high-margin cloud business are major growth catalysts. Analysts forecast annualized earnings growth of 23% over the next several years, and that is enough to deliver returns for shareholders that significantly outpace those of the Dow Jones.
2. American Express
American Express(NYSE: AXP) stock has soared this year. The iconic card brand is enjoying great momentum in signing up new cardholders and healthy card member spending. The company reported record revenue in the second quarter, leading to a robust 21% year-over-year increase in adjusted earnings per share.
There's a debate whether the economy is headed for a recession, which would be a headwind for a credit card company that needs to see growth in consumer spending to perform well for investors. Analysts will point to the inverted yield curve on U.S. Treasury bonds that has a long history of accurately predicting slowdowns in the economy, and of course there are indicators from a micro level, including Amazon's lower rate of growth from retail customers last quarter.
However, the momentum American Express is experiencing in a choppy consumer spending environment reflects the strength of its brand and favorable card member demographics. Its card members tend to spend more on average than holders of other credit card brands, which lends itself to plenty of opportunities to grow the business over the long term.
American Express shareholders are in good company, since this is one of Warren Buffett's favorite stocks. The legendary CEO of Berkshire Hathaway has held American Express shares for over 30 years. With the shares trading at a fair forward P/E of 19, the stock should perform in line with the company's future earnings growth, which points to market-beating return potential. Analysts are forecasting 15% annualized earnings growth in the coming years.
3. Nike
Investors have a great opportunity to buy one of the most iconic brands in the world at its lowest share price in years. Nike(NYSE: NKE) stock has fallen 55% from its previous highs following weak sales performance, but the company is making moves to grow the business again that could send the stock back to its previous highs.
Nike's recent financial results are not as bad as the stock's performance would suggest. The company posted a 2% year-over-year decline in revenue last quarter, with weak sales in lifestyle products mostly to blame. The weak demand environment may take Nike a year or so to turn things around, but the important thing is the company is still very profitable and continuing to invest for the future.
Demand for Nike's performance gear is still healthy. In the fiscal fourth quarter which ended in May, Nike's new running releases such as Vomero, Invincible, and Infinity experienced strong demand. Running footwear has been the brand's bread and butter for decades, and the strength here suggests Nike can improve top-line growth by more innovation within its core performance categories like basketball and running shoes.
Nike stock trades at a fair forward P/E of 25. Analysts have low expectations for Nike's future right now, but management's efforts to lower costs and boost margins should lead to double-digit annualized earnings growth in the coming years, which could deliver market-beating gains for Nike shareholders.
Should you invest $1,000 in Amazon right now?
Before you buy stock in Amazon, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,404!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 9, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nike. The Motley Fool has a disclosure policy.
