The Dow Jones Industrial Average, or Dow 30, is an index of 30 blue-chip stocks that, taken together, is supposed to serve as a bellwether for the American economy. But that doesn’t mean that every stock in the Dow is a strong performer. Quite the opposite. Many of the stocks in the Dow are of companies that have grown long in the tooth and are now considered to be value traps.
Critics of the Dow point to the current crop of underperforming stocks and claim that the index is outdated and no longer representative of the market or economy. Many critics call for reform and major changes. While we wait for that to happen, here is a list of three Dow stocks to avoid.
IBM (IBM)
Technology giant IBM (NYSE:IBM) has largely been left out of the artificial intelligence (AI) rally this year. Over the last 12 months, IBM stock has risen 8.5% compared to a 36% gain in the technology-laden Nasdaq index. While the company has started to talk about the role it could play in AI, the legacy tech company isn’t viewed as a major player in the space and its share price continues to trail the broader market partly as a result.
IBM attributes its third-quarter financial results that beat Wall Street forecasts to the success of its AI strategy. The company has been making a big push into generative AI and it says that customers are increasingly adopting its watsonx.ai platform. However, IBM said it earned “low hundreds of millions of dollars” from its generative AI projects in Q3, which is only a fraction of its $61 billion in annual revenue. IBM stock today is trading 20% lower than when it was at its height a decade ago. Given its lackluster performance in important new sectors of the technology industry, IBM should definitely be on the list of Dow stocks to avoid at this time.
Johnson & Johnson (JNJ)
Pharmaceutical company Johnson & Johnson (NYSE:JNJ) is coming to the end of a very bad year. JNJ stock is closing out 2023 12% lower than where it started last January. Over the last five years, the company’s share price is only up a tepid 17%. Declining sales of Covid-19 vaccines, as well as a slowdown in consumer spending, is weighing on the stock. However, the darkest cloud circling overhead continues to be the lawsuits related to the company’s use of talcum powder in its products.
Johnson & Johnson has faced thousands of lawsuits claiming that its talc-based products, notably the baby powder, were contaminated with asbestos and caused ovarian cancer in women that led to multiple deaths. To protect itself, Johnson & Johnson spun off those products into a new publicly traded company called Kenvue (NYSE:KVUE). However, Johnson & Johnson has said that it will still assume all talc-related legal liabilities that arise in the U.S. and Canada, which are expected to run into the billions of dollars. Until the uncertainty around the outcomes of these cases and the potential blow to Johnson & Johnson’s bottom line becomes more clear, JNJ is another one of the Dow stocks to avoid.
Verizon (VZ)
Among the worst Dow stocks, telecommunications company Verizon (NYSE:VZ) is a real stinker. In 2023, VZ stock has declined 5.7%, bringing its loss over the last five years to 33.7%. The share price continues to slide lower even as the market rallies. Not even a quarterly dividend yield above 7% is enough to entice investors to take a position in this stock. The big issue holding VZ stock down remains its massive debt load that now stands at $147 billion.
Verizon’s debt burden is so great that the company is spending 19% of its operating income just to service the interest payments. The wireless provider also faces intense competition and its growth has slowed to the single digits in recent years. Verizon’s 2022 revenue of $136.8 billion was less than 10% more than in 2017. Many investors want to see double-digit growth from the company and, as such, view Verizon as another one of the Dow stocks to avoid.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.