Not all major indices have performed equally well so far in 2024. Year to date, the Nasdaq Composite is up 22.3%, while the S&P 500 index has delivered a solid 16.7%. However, the Dow Jones Industrial Average is sorely lagging with less than a 5% year-to-date gain.

While it’s typical for the Dow to underperform more growth-focused indexes during bull markets, this level of underperformance is a bit surprising considering outsized gains from Amazon, Microsoft, Goldman Sachs, and other large Dow components. Dig deeper, however, and there have been some significant sell-offs in reliable blue-chip stalwarts like UnitedHealth Group and Home Depot.

This could also spell opportunity. My preferred approach is to filter out the noise and focus on a path to recovery rather than getting too caught up in everything that is going wrong at the time. The Dow is a good starting point because many components have strong long-term investment theses.

Year-to-date, McDonald’s (NYSE: MCD) is the fourth-worst-performing Dow stock and Nike (NYSE: NKE) has been the worst. Despite some noteworthy obstacles, here’s why both companies stand out as particularly strong buys now.

An adult and a child smiling while sitting on a basketball court with a basketball and a water bottle.

Image source: Getty Images.

Nike is in a historic slowdown

Nike is hovering around its lowest level since the COVID-19 pandemic-induced plunge in spring 2020. At first glance, the sell-off seems unwarranted, considering that Nike’s sales are close to an all-time high and margins aren’t that low.

NKE ChartNKE Chart

NKE Chart

However, the stock market cares more about where a company is headed than where it has been. And unfortunately, Nike has reached a breaking point.

Cracks in Nike’s business have been forming for a while now. After the company reported its first-quarter fiscal 2023 earnings in late September 2022, Nike stock tumbled all the way down to $82.22 per share on Oct. 3, 2022. The sell-off was due to falling profit, inflated inventory levels, and challenges with growth out of key markets, including China.

Nike’s recent earnings call featured many of the same nagging themes. Revenue growth has ground to a halt — with sales falling 2% in fiscal 2024. Expectations are even worse for fiscal 2025, with revenue expected to fall mid-single digits. The forecast is particularly bad considering Nike had guided for positive sales growth in fiscal 2025 during the March earnings call.

It’s somewhat ironic that Nike’s Board of Directors approved a massive $18 billion stock buyback program in June 2022 — right before problems accelerated. In fiscal 2024, Nike bought back $4.3 billion in stock and paid $2.2 billion in dividends.

Growing the dividend and buying back stock can be an effective way to return capital to shareholders if the underlying business is on solid footing. But in Nike’s case, the business is in its worst shape in years, so putting capital to work to help the business improve rather than plugging away at buybacks could be a better move.

Nike isn’t showing many signs of turning things around anytime soon, so buying the stock now is really a bet on the brand and Nike’s track record rather than where the fundamentals stand today. The glass-half-full outlook on Nike makes the stock a strong buy now. Nike has been hit hard by a one-two punch of tight consumer spending and formidable competition from smaller brands, such as Deckers Outdoor-owned Hoka and On Holding.

However, Nike has overcome competition and economic challenges before, and there’s reason to think it can right the ship again. Nike has expanded its e-commerce business and understands that selling directly to consumers opens the door to higher margins and better customer engagement. The more Nike can tap into an omnichannel business model, the higher its margins and revenue growth will likely be.

The dividend yield is up to 1.9% and the forward price-to-earnings (P/E) ratio is down to 23.6 — which is Nike’s highest yield in 15 years and an inexpensive valuation for an industry-leading business. In sum, Nike stock is tumbling for valid reasons and could have more room to fall. But the business could also look far different in three to five years, making now an excellent opportunity to consider buying the stock.

McDonald’s is restoring value

Like Nike, McDonald’s has been impacted by a price-conscious consumer. McDonald’s hiked prices to keep up with inflation, which initially worked. But there’s concern that McDonald’s has run out of room and needs to remind customers that they can get good value by going to its restaurants. McDonald’s last earnings call was chock-full of concern that sales growth is under pressure and the company needs to restore its image.

On June 20, McDonald’s issued a press release announcing its “highly anticipated $5 Meal Deal” which includes a McDouble or McChicken sandwich, small fries, four-piece chicken McNuggets, and a small soft drink. It also announced a free medium fry with any $1 purchase every Friday through its app through the end of 2024. Even if McDonald’s barely turns a profit on these deals, they could be just what the company needs to boost traffic — especially as families are out and about over the summer.

McDonald’s is best in breed when it comes to returning capital to shareholders. The company has been raising its dividend and buying back stock at a breakneck pace. Over the last decade, McDonald’s has more than doubled its dividend while reducing its share count by over a quarter. In October, the company boosted its dividend by 10%, marking the 47th consecutive dividend raise and putting McDonald’s on track to become a Dividend King by 2026.

Meanwhile, buybacks have helped accelerate earnings-per-share growth — making the stock a better value. Over time, buybacks can help earnings per share (EPS) grow faster than net income.

MCD EPS Diluted (TTM) ChartMCD EPS Diluted (TTM) Chart

MCD EPS Diluted (TTM) Chart

In the chart, you can see that McDonald’s stock has put up impressive gains over the last decade, with the stock price going up nearly twice as much as net income. But thanks to buybacks, EPS growth has mostly kept up with the stock price, which is why McDonald’s P/E ratio is only slightly higher today than it was a decade ago. And in fact, it is currently lower than its historical averages.

MCD PE Ratio ChartMCD PE Ratio Chart

MCD PE Ratio Chart

McDonald’s has faced a slowdown in consumer spending and economic cycles before. There’s no reason to believe that its current setbacks impact the long-term investment thesis, making McDonald’s and its 2.7% dividend yield an  attractive opportunity for patient investors.

Nike and McDonald’s have fallen far enough

A stock’s price can be heavily influenced by short-term factors rather than the company’s underlying characteristics or where the business could be three to five years from now. The key is to filter out the noise and decide if these concerns haven’t already been reflected in the stock price, or if the stock has been overly punished.

Nike is down over 30% year to date, while McDonald’s is down just over 15%. But Nike is admittedly facing greater challenges than McDonald’s.

It’s impossible to know when either stock will stop selling off, but it is possible to get a good idea for why a stock is selling off. For Nike and McDonald’s, it’s all about returning to growth while maintaining margins. Given their strategies, I could see both companies focusing more on sales growth in the near term and worrying about margins later. It could take a while for Nike and McDonald’s to return to the consistent growth that investors have grown accustomed to, but both stocks have solid dividends and compelling valuations.

One of the best ways to compound money in the stock market is to invest in great companies when they are out of favor and hold shares through periods of volatility. Nike and McDonald’s have sold off far enough that they are both worth a closer look now.

Should you invest $1,000 in Nike right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nike. The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, Home Depot, Microsoft, and Nike. The Motley Fool recommends On Holding and UnitedHealth Group and recommends the following options: long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The S&P 500 Just Hit an All-Time High, but These 2 Dow Dividend Stocks Are Buys Near Their 52-Week Lows was originally published by The Motley Fool

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