With just over a month to go in 2022, that seems clear Nike (NKE 0.12%) and Microsoft (MSFT -0.02%) will be among the weakest performers at this year’s Dow Jones Industrials (^DJI) table of contents. They are two of the five worst-performing stocks in the index through mid-November, and their latest earnings announcements have not been well received on Wall Street.
Investors can generate returns in line with the market by focusing on stocks that are temporarily out of favor and otherwise have excellent long-term prospects. That could be the exact situation for these two blue-chip giants.
Let’s see if Nike and Microsoft could be excellent picks for patient investors after their 2022 share price declines.
Nike has stock problems
Nike’s shares are plagued by concerns about how an economic slowdown could hurt its footwear and apparel business. Gross profit margin declined last quarter as the company lowered prices. Nike predicted more weakness ahead as management works to bring supply levels back in line with demand.
But things aren’t as bad as the most recent 44% stock spike suggests. That increase had a lot to do with temporary issues, such as the timing of holiday orders from retailers and the temporary shutdown of factories in Vietnam and Indonesia a year ago over pandemic concerns. Executives said at the end of September they see strong demand for new product launches despite a temporary oversupply.
Nike also has a good chance of increasing profitability in the coming years as it shifts from its retail partnerships to a more direct relationship with consumers. However, investors should look for concrete signs of this success before calling the stock a screaming buy.
Microsoft has money
Microsoft’s 2022 decline was partly caused by unrealistic expectations for 2021. The stock rose more than 50% last year, or more than double the Dow’s rise as investors predicted pandemic growth well into the future.
These growth rates did not last long. Microsoft is seeing demand for PC hardware fall and is under pressure in communications software and gaming. It makes sense that the stock would lose some of that gain in 2021 in that context.
But the long-term outlook is rosy. Microsoft is well positioned in many attractive tech niches, including cloud business services, video games and the shift to flexible working. Growing demand in these areas should help Microsoft expand sales and revenue faster than most of its peers.
In the meantime, the software giant is brimming with cash, even after accounting for its impending acquisition of Activision Blizzard. Management recently increased the dividend by 10% as the company generated $21.5 billion in operating income through the end of September.
Certainly, those earnings trends are likely to weaken in late 2022 and early next year. But Microsoft is in no danger of losing market share or scaling back investments in its innovation pipeline. As a result, the stock looks more attractive after falling more than 25% so far this year.
While investors may currently be making solid returns picking up Nike and Microsoft, the software giant appears to have a clearer recovery path ahead.
Demitri Kalogeropoulos has positions in Activision Blizzard and Nike. The Motley Fool has positions in and recommends Activision Blizzard, Microsoft and Nike. The Motley Fool has a disclosure policy.