The Dow Jones Industrial Average is down more than 6% year-to-date. With slightly more than half of the index in negative territory for the year, it is easier to come up with three of the top Dow stocks for 2023. 

While there appears to be a recession in the cards, Wells Fargo senior global market strategist Sameer Samana believes it will be far more moderate than in 2008, when consumers were overextended.

Each of the names making my list of excellent businesses do so because of their strong free cash flow generation. Together, they have generated nearly $140 billion in trailing 12-month free cash flow.

Two of the three names are down approximately 20% on the year, while the third is up big time in 2022. Can you guess which it is?

With a strong December, it’s possible that the Dow could get back to breakeven by New Year’s Eve. But even if it doesn’t, all three of these Dow stocks are excellent long-term holds. 

Apple (AAPL)

Apple (NASDAQ:AAPL) stock dropped nearly 2% on Black Friday. Investors were concerned that the labor unrest at Foxconn’s factory in China, which makes iPhones, would hurt supply this holiday season. 

I recently read an article from TheStreet.com entitled “How Warren Buffett Got Apple Stock Wrong.” The gist of the article was that Buffett sold 94 million of Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) Apple stock from Q2 2020 to Q4 2021, missing out on approximately $8.4 billion in unrealized gains [$177.57 (price on Dec. 31, 2021) less $88.41 (price at the end of June 2020) multiplied by 94 million shares (981 million shares Q2 2020 less 887 million Q4 2021)].

To determine if Buffett made a genuine mistake, one would first have to calculate where the proceeds were reinvested and how those purchases performed in 2022. I’m not going to do that.

What I do know is that many people thought he got Occidental Petroleum (NYSE:OXY) wrong when he made the initial investment back in 2019. In hindsight, it was excellent timing on Buffett’s part.

Apple reported its Q4 2022 results in late October. For the full year, its revenues were $394 billion, with an operating profit of $119 billion, good for an operating margin of 30.2%. That puts it seventh out of 30 DJIA companies, and high on my list of Dow stocks for 2023.

However, the gross margin for its services business is notable, at 71.7% in 2022, almost double that of its products business. 

So, if Apple had no services revenue, it would have needed to generate product revenues of close to $632 billion in fiscal 2022. 

That’s why Tim Cook has been good for Apple.

Home Depot (HD)

Barron’s reported on Nov. 25 that Paula Santilli, one of Home Depot’s (NYSE:HD) newest directors — Santilli and Caryn Seidman-Becker joined the board on March 1 — bought 1,583 shares of HD for $315.80 each on Nov. 16.

As far as I can tell, Home Depot doesn’t have any minimum stock ownership requirements for its directors, just its named executive officers. So, the purchase of just less than $500,000 in stock is a vote of confidence by Santilli, who also runs Pepsi’s (NASDAQ:PEP) Latin American operations.

As I like to say, “There are plenty of reasons why people sell a stock, but only one reason they buy.”

Home Depot reported Q3 2022 results in mid-November that were better than expected. HD stock has gained about $20 since. 

On the top line, its revenues were $38.87 million, $910 million higher than analyst expectations, while its earnings per share were $4.24, 12 cents better than the consensus.

Interestingly, inflation and higher interest rates might help Home Depot because consumers are staying home more often to cut down discretionary spending. Still, home improvements are one thing they’ve been unwilling to put on hold. 

I guess we’ll find out in 2023, but it’s been growing sales per square foot by 5% through the first nine months of 2022’s fiscal year. A positive Q4 2022 earnings report would likely push it near $400, where it traded earlier this year. 

HD stock trades at 2.09x sales, its lowest level since 2018.

Merck (MRK)

The last of our three Dow stocks to take seriously is a pharmaceutical powerhouse. It’s been more than a year since Merck (NYSE:MRK) spun off Organon (NYSE:OGN), its former operating segment focused on women’s health. It now has six years of exclusivity left on Keytruda, its blockbuster PD-1 (programmed death receptor-1) immunotherapy, before it loses its market exclusivity. 

In Q3 2022, Keytruda accounted for 36% of its $15.0 billion revenue. Its next best-selling drug was Gardasil and Gardasil 9 — a vaccine used to prevent HPV (human papillomavirus) that can lead to cancer if undetected — with revenues less than half that of Keytruda. 

Merck is doing two things to prepare for the loss of exclusivity in 2028.

First, it uses Keytruda, combined with other drugs, to help treat various cancers. The company recently revealed positive results from a phase 3 trial combining Keytruda with chemotherapy to treat gastric cancer. In combination, they’ve helped patients live longer. 

Secondly, it’s making big and small acquisitions to replace some of the revenue that will be lost in 2028. Most recently, it acquired Imago BioSciences (NASDAQ:IMGO) for $1.35 billion. This clinical stage biopharmaceutical company is developing new medicines for treating bone marrow diseases. Another large acquisition was Acceleron (NASDAQ:XLRN) in November 2021. It paid $11.5 billion for the developer of cardiovascular-related treatments.

Merck’s trailing 12-month free cash flow is $15.2 billion [key ratios]. Based on a market cap of $272.6 billion, it has a free cash flow yield of 5.6%. I consider anything between 4% and 8% to be fair value. 

Up nearly 40% on the year, it looks ready to finish the year on a high note. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.