January was an excellent start to the year for the Dow Jones Industrial Average as it rose 2.8% for the month. Some stocks within the index are soaring with Salesforce (CRM 2.44%), Disney (DIS 1.44%), and American Express (AXP 1.27%) leading the way.
With how fast this trio has run up, some investors might wonder if there is still room to go. Let’s find out if this is the start of something big or just a one-off rally.
Earlier this year, I wrote about the Dow Jones’ worst-performing stocks of 2022, and Salesforce and Disney both made the list. You won’t be surprised at either stock’s performance in January if you read that article. Salesforce entered the year highly undervalued, and its quick rebound reflects that.
Another item that pleased investors was its decision to lay off 10% of its workforce — about 8,000 employees. This move should help control Salesforce’s operating expenses, which rose 6% during its fiscal 2023 third quarter (ended Oct. 31). While that’s not as aggressive of a rise as many other companies have seen, it’s crucial that Salesforce controls its spending as it works toward increased profitability.
Salesforce only posted $210 million in profits during that quarter — a 2.7% net margin. With fiscal fourth-quarter revenue guidance only projecting about 9% growth, Salesforce can’t depend on its top line to deliver the numbers it needs to stay at a growth-at-all-costs state.
Salesforce should report earnings sometime in late February to early March, and investors need to tune in to hear what is said about its fiscal 2024 outlook. In the meantime, Salesforce is still below its historical valuation levels, so the stock likely has more room to run.
Disney nearly matched Salesforce’s January performance with a 25% return. However, there weren’t any obvious catalysts driving the stock higher last month. That said, it was also undervalued after entering the year at essentially its lowest price-to-sales ratio (1.9) in a decade. Even at today’s prices, it’s well below its decade-long average of 3.3.
There’s also quite a buzz with legendary CEO Bob Iger’s return to the company. Many expect him to right the ship following Bob Chapek’s tenure, but all eyes are on Disney+, the company’s streaming service. During its fiscal 2022 fourth quarter (ended Oct. 1), management guided that Disney+ should turn the profitability corner during fiscal 2024. That’s still a way off, and with Disney’s low $0.09 earnings per share (EPS) in the fourth quarter, it needs to accelerate that timeline.
Furthermore, its revenue growth in the quarter was only 9%, compared to a 23% increase for the full year. With revenue levels already above pre-pandemic highs, Disney may have reached its revenue ceiling, making fiscal 2023 a hard year to predict.
Disney is still well below its normal valuation levels, but with the potential profitability of Disney+ unknown, the company isn’t a surefire long-term investment. However, it likely will continue to have a strong 2023 due to its depressed valuation.
In 2022, American Express stock fell only 9.7% — pretty good compared in the grand scheme of last year’s bear market. However, with a 16.9% rise in 2023, it’s already set itself apart as one of the best performers in the Dow.
American Express’ biggest catalyst was its fourth-quarter earnings report, released on Jan. 27, which promptly sent shares up 10.5% that day. Although EPS fell 5% to $2.07, revenue rose 17% year over year. Furthermore, the company provided a bullish 2023 outlook, expecting about 16% revenue growth with EPS rising 14% (both figures based on the midpoint of management’s range).
Another contributor to the optimism was management’s statement that “millennial and gen z customers continue to be the largest drivers of our growth, representing over 60% of proprietary consumer card acquisitions in the quarter and for the full year.” Capturing this cohort is a massive key for future success, and American Express seems to be delivering.
The stock is trading around its average price-to-earnings valuation for the past decade. Given the outlook for 2023, I won’t be surprised to see American Express’ continue to outperform the broad market.
American Express is an advertising partner of The Ascent, a Motley Fool company. Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.