The Dow Jones Industrial Average can be paraphrased as the Dow. The stock market, a popular indicator of the U.S. economy, has increased by 5.5% so far this year. However, there are concerning indications that the U.S. economy may enter a recession in the near future. In particular, the job market has weakened, with unemployment consistently rising over the last year as reported by the most recent data from the U.S. Bureau of Labor Statistics.
During periods of economic decline, investors usually choose to sell off their holdings in large-cap U.S. stocks to realize gains. Amazon ( AMZN -0.08% ) and Merck ( MRK -0.71% ) Both stocks in the Dow Jones index are attractive options for investors looking to hold onto their investments for an extended period. Let’s delve into the reasons behind these choices. highly stable and reputable stocks Excel in this suboptimal investing climate.
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Amazon is a massive online retail company that has a wide range of business activities.
Amazon is a leading force in online shopping, using its large size to provide customers with a quick and effective shopping process. The key strength of the company lies in its extensive network effect, which boosts customer loyalty and generates consistent, profitable income from Amazon Prime subscriptions.
Nevertheless, Amazon’s expansion plan extends beyond online retail. The company’s most profitable divisions, Amazon Web Services (AWS) and advertising, have shown strong demand in the past few quarters. These important sectors are more resistant to economic downturns, offering protection in case of a possible recession.
Analysts on Wall Street expect the company’s revenue to increase by over 10% in both 2024 and 2025, primarily due to the strong performance of its AWS and advertising divisions. However, the drawback is that Amazon and its high double-digit revenue growth come at a steep price, with shares currently trading at more than 36 times projected earnings.
In order to understand this valuation metric correctly, it is important to consider the benchmark. S&P 500 Currently, the stock is trading at approximately 21 times future earnings, indicating that the shares are relatively expensive in comparison to other investments.
However, Amazon’s strong competitive position, various sources of revenue, and impressive growth justify the value of its shares.
A leading pharmaceutical company with an excellent product development pipeline
Merck is a prominent company in the pharmaceutical sector due to its top-selling cancer drug Keytruda and its strong lineup of possible highly successful treatments. The company’s stock is priced attractively at a multiple of 14.2 times its expected future earnings, which is lower than the average of 17 times for other major pharmaceutical companies.
In addition to its low valuation, Merck also provides a substantial annual dividend yield of 2.7%, which is strongly backed by its earnings as indicated by its payout ratio of just 56.3%.
Merck’s success is strongly linked to Keytruda, a drug that is expected to have its patent expire in 2028. However, analyst Damien Conover, CFA®, from Morningstar, suggests that recent approvals for using Keytruda in earlier treatment stages could help Merck achieve around 10% annual growth over the next five years. Additionally, Merck is working on a new subcutaneous version of Keytruda, which could potentially prolong its patent protection until the late 2030s.
The company is introducing a number of new assets for growth. For example, the recently released rare-disease medication Winrevair and advanced cancer therapy V940 each offer potential commercial opportunities exceeding $3 billion.
Overall, Merck’s stock appears to be priced lower than its potential for growth in the coming years. Investors may consider investing in this leading pharmaceutical company as it is currently trading at a significant discount compared to its competitors.
Key takeaways
Amazon and Merck are seen as attractive investment options in today’s market. Amazon’s strong competitive advantage and varied business structure are expected to lead to positive returns for investors in the long run. Additionally, the AWS and advertising divisions offer some protection from economic instability.
Merck is seen as a pharmaceutical company that is not valued highly, but offers a good dividend yield and has a pipeline of products that are not fully recognized for their potential.
