The top three stocks on the Dow Jones in Q3

Key points

• The Dow Jones rose 8.2% in the third quarter.

• The 3M Company was by far the best performer, up 34% in the quarter.

• IBM and McDonald's also had strong quarters.

The third quarter proved to be a good one for the Dow Jones. These three stocks performed the best.

The Dow Jones Industrial Average finished the third quarter at an all-time high after rising 8.2% in Q3. The Dow Jones outperformed all of the major indexes in the quarter, except for the Russell 2000, as investors turned to the stable, blue-chip stocks that make up the index amid the volatility that occurred among tech and growth stocks.

Overall, 22 of the 30 Dow Jones stocks had positive returns in the quarter, but the winners did not include Magnificent Seven stocks Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), or media giant Disney (NYSE:DIS), all of which were down.

Here are the top three performers on the Dow Jones in Q3.

1. The 3M Company, up 34% in Q3

The 3M Company (NYSE:MMM), the industrial stalwart that makes some 60,000 different household products, like Scotch Tape and Post-It Notes, has struggled mightily in recent years. It has been dragged down by one controversy after another, from faulty earplugs to contamination, which have resulted in billions of dollars in legal judgements.

The stock has sputtered for most of the past 10 years, with an average annual return of 1.5%, but things have turned up since 3M settled its legal issued and hired a new CEO, William Brown, on May 1.

Specifically, 3M stock shot up some 23% after its surprisingly good second quarter earnings report, with earnings up 117% year over year. Further, it raised its guidance for the rest of fiscal 2024. That helped fuel its 34% surge in Q3. Currently, the stock is up 48% year-to-date and is the second best performer on the Dow this year.

3M has always been a great dividend stock, a Dividend King, in fact, with 65 years in a row of dividend increases. With a solid yield of 2.1% and its financials improving, it remains a solid buy for income investors. However, it does have a high P/E ratio after the Q3 surge, so the price will likely plateau in the near-term.

2. IBM, up 23% in Q3

IBM (NYSE:IBM) has made the transition from the leading manufacturer of personal computers to its present-day leadership in cloud computing and AI consulting, two of the fastest growing segments in the tech space.

IBM’s stock price soared 23% in Q3 and is now up 35% year-to-date, making it the fourth best performing stock on the Dow Jones this year.

Much of IBM’s gains have come in the past month, as it launched several new initiatives, including the acquisition of Accelalpha, an Oracle services provider, and its expanded consulting relationship with Oracle. It was also boosted by a strong second quarter earnings report, with earnings up 14% year over year and the gross profit margin expanding to 57%.

Even with its strong performance this year, IBM is that rare tech stock that is still relatively cheap, with a P/E ratio of 24. However, the consensus price target among analysts is $202 per share, which would be down about 8%. I’m a bit more bullish than that as it still looks attractively valued and has plenty of growth potential. It’s definitely a hold, and a solid buy if it dips.

3. McDonald’s, up 22% in Q3

McDonald’s Corp. (NYSE: MCD) had an excellent third quarter, rising 22% to lift its stock price to $304 per share as of September 30. The fast food restaurant chain stock had been trading at below $249 per share in early July, down around 16% YTD, before surging over the past three months. McDonald’s stock is now up about 3% YTD.

McDonald’s stock ticked up in the days after its second quarter earnings results were released on July 29, despite the fact that revenue and earnings were down, year over year, and the results fell short of estimates.

Investors may have been jumping on the stock at that point, after some bad economic news had the market in a panic that there might be a recession looming. In coincided with McDonald’s reiterating its commitment to the $5 value meal, which may have led investors to view McDonald’s as a good stock to on in tough times. It also surged after the Fed lowered interest rates on September 17.

On October 3, the company announced it was rolling out the Chicken Big Mac on October 10, which could provide a sales boost for the company.

Overall, I don’t see a ton of upside in the near term with McDonald’s stock, as the run up was more of a function of investors buying low.