We recently compiled a list of the 9 Best Dow Stocks to Buy According to Analysts. In this article, we are going to take a look at where Merck & Co., Inc. (NYSE:MRK) stands against the other Dow stocks.
Since its introduction in 1896, the Dow Jones has undergone significant changes but remains a popular benchmark for measuring the economy and the overall stock market outlook. While the Index has gained 13% year to date, it has lagged the S&P 500, up by 21% over the same period.
The significant underperformance is because the Dow is mostly made up of blue-chip American companies, most of which have come under pressure amid deteriorating macroeconomics. While the Index is mostly made up of financial services companies at 23%, followed by technology at 20%, it has felt the full brunt of deteriorating economic conditions.
READ ALSO: 8 Worst Performing Tech Stocks in 2024 and 10 Worst Performing Blue Chip Stocks in 2024.
The U.S. economy is reeling from the effects of high interest rates, resulting in a slowdown in the labour market, and the manufacturing sector has significantly affected the Dow holdings. Additionally, the soaring geopolitical tensions in the Middle East have rattled investors’ sentiments, resulting in most of them shunning equities in favor of safe havens like bonds and treasuries.
The uncertainty around the upcoming U.S. presidential election has only exacerbated the situation, with investors shunning stocks that would be affected mainly by a change of policies once there is a leadership change at the White House. According to analysts at Bank of America, who ends up in the White House and Congress could have a significant impact on critical corners of the stock market.
“Profits accelerating are far more important than who is sitting in the Oval Office. But politics can make or break sub-sectors,” the firm wrote in a research note to investors.
Amid the headwinds, the overall equity market has been trading higher, with major indices led by the Dow and the S&P 500 rallying to record highs. The strong gains have come on most companies delivering solid financial results and shrugging off the effects of high interest rates. Nevertheless the rallies have resulted in overstretched valuations, raising serious concerns for the investment community.
“The market had moved into overbought territory, making it vulnerable to anything it perceives as negative … It’s now worried that the Fed has not declared victory on inflation, and not to mention, the concerns post-election,” said LPL Financial chief global strategist Quincy Krosby.
A resilient U.S. economy that has steered clear of recession has helped support most stocks in the Dow, helping fuel the upward momentum. The International Monetary Fund thinks growth in the U.S. will remain robust. In its latest World Economic Outlook, the IMF increased its estimate for U.S. GDP in 2024 to 2.8% from its 2.6% forecast in July while raising its 2025 growth forecast for the country. It’s the only advanced economy with its economic trajectory revised upwards for both years by the IMF. Nevertheless, it has warned of slowdowns in emerging markets.
“Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries. Having growth stuck in low gear could also further exacerbate income inequality within economies,” the IMF warned.
With the U.S. economy expected to remain resilient as the Federal Reserve pushes forth with interest rate cuts, Dow stocks that have underperformed are well poised to bounce back. A lower interest rate environment on the back of improved economic conditions heading into year-end would make the case for the best Dow stocks to buy, according to analysts.
Our Methodology
To compile our list of the best Dow stocks to buy according to analysts, we started by analyzing the Dow Jones Industrial Average. We screened these stocks based on average price targets, focusing on stocks with significant upside potential. Finally, we ranked these companies in ascending order based on their price target upside as of October 23. We have also mentioned the hedge fund sentiment around each stock.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a person’s hand holding a bottle of pharmaceuticals.
Merck & Co., Inc. (NYSE:MRK)
Average Upside Potential as of October 23: 29.15%
Number of Hedge Fund Holders: 96
Merck & Co., Inc. (NYSE:MRK) is one of the best Dow stocks to buy, according to analysts, for diversifying an investment portfolio in the healthcare sector. The company offers human health pharmaceutical products in the areas of oncology, hospital acute care, immunology, and neuroscience.
The company’s long-term prospects revolve around its cancer drug Keytruda, which became the best-selling drug worldwide. The pharmaceutical company reported $16.1 billion in revenue for the second quarter, a 7% increase from the previous year. Sales for Keytruda totaled $7.3 billion, a 16% increase over the same period last year.
Even though Keytruda accounts for a large portion of Merck & Co., Inc. (NYSE:MRK)’s revenue, the company has been working to build its pipeline and become less reliant on the wildly popular blockbuster medication. New medications, such as the pulmonary arterial hypertension medication WINREVAIR, will be crucial in making up for the lost income.
Analysts predict that its sales will surpass $6 billion by 2029 and reach a much higher peak of $11 billion. These figures are not comparable to those of Keytruda, but Winrevair and other resources might lessen the impact on Merck & Co., Inc. (NYSE:MRK) and even guarantee an increase in revenue. The pneumococcal vaccine Capvaxive, which regulators approved earlier this year, is a more modest growth catalyst. It may generate over $1 billion in sales by 2027.
Merck is investing more in cancer treatments by agreeing to pay Japanese company Daiichi Sankyo $5.5 billion last year to co-develop three of its antibody-drug conjugates. These therapies specifically target cancer cells, which may be more successful than conventional chemotherapy, harming healthy cells.
Consequently, Merck & Co., Inc. (NYSE:MRK) should be able to expand its operations even after the patents for Keytruda expire, given the abundance of opportunities available and the potential for even more in the future. This explains why the stock is rated as a Buy with an average price target of $137.73, implying a 29.15% upside potential.
As of Q2 2024, from the total number of hedge funds that Insider Monkey tracked, 96 held stakes in Merck & Co., Inc. (NYSE:MRK), with Fisher Asset Management being the largest stakeholder with shares worth $1.77 billion.
Regarding Merck & Co., Inc. (NYSE:MRK), Carillon Tower Advisers’ Carillon Eagle Growth & Income Fund made the following statement in its investor letter for the first quarter of 2024:
“After posting lackluster returns in 2023, Merck & Co., Inc. (NYSE:MRK) got off to a strong start in January by raising the long-term sales forecasts for its oncology and cardiology pipelines and reporting solid fourth-quarter results, coupled with strong financial guidance for 2024. Merck shares also finished the quarter strong after receiving U.S. Food and Drug Administration approval in late March for a new cardiology medicine with the potential to contribute significantly to sales growth over the next several years.”
Overall MRK ranks 1st on our list of the best Dow stocks to buy according to analysts. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.