Dogs of the Dow come up a little short


We have tracked the Dogs of the Dow strategy for the last four years, with 2017 being the first year since we started following the group that the strategy has underperformed the overall market.

The stocks in this year’s group have failed to keep pace with the overall Dow Jones all year, but the group did make a good charge at the end of the year to almost beat the overall market for yet another year.

It was an amazing year for the market as a whole, with the Dow Jones consistently hitting new highs, and closing out the year with a gain of 24.2%. The stocks in this year’s Dogs of the Dow group finished out the year up 23.1% including dividends.

To illustrate just how powerful dividends are to a portfolio’s overall performance, if we backed out the gains associated with the dividends that were paid during the year, the ten stocks in this year’s group would have appreciated just 19.4%.

There were a couple major outliers in this group, but only three stocks were able to outpace the overall market. Four of the ten stocks ended the year in the red and prevented the strategy from enjoying another successful year. Let’s take a closer look at the stocks, and which were able to bring the group close to break-even with the broader market.

Boeing and Caterpillar enjoy break out years

The two major outliers in this year’s group were Boeing (BA) and Caterpillar (CAT). Boeing ended the year up 93.3% including dividends, while heavy machinery maker Caterpillar wound up gaining 73.3%. Both stocks rose steadily through the year, and each remain just pennies below their all-time highs. Boeing remains very attractive, with a P/E of 27.1, and forecast average earnings growth of 17.0% for the next five years. Caterpillar looks like less of a value at this time, with a P/E of 105, but analysts do forecast per annum earnings growth of 39.7% for the next five years. Overall economic conditions remain positive for both companies, but both stocks will likely cool off during the current year. BA trades at $294.91, with an average price target of $292.07, while CAT trades at $157.58 vs an average price target of $147.93.


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Cisco beats the market while Coca-Cola trails

Cisco Systems (CSCO) was the third stock to beat the Dow Jones, rising 30.5% including dividends. Soft drink maker Coca-Cola (KO) finished the year up 14.2%, but that gain was not enough to match the performance of the overall market for the year. Cisco trended sharply higher during the latter part of the year, and shares are currently just shy of their 52-week high. Coca-Cola got off to a quick start to the year, but shares traded sideways during the final quarter of the month while the overall market continued to move higher. CSCO trades with a P/E of 19, while KO’s valuation is much higher, with a P/E of 44.2. KO appears to be capped by its current valuation, as analysts forecast earnings will grow by just 4.8% per annum over the next five years, which is unlikely to be enough to push shares higher considering how expensive they already appear. The stock trades at $45.88, and analysts have an average price target of $48.77 on the stock. CSCO look more attractive, with earnings expected to rise 9.3% on average over the next five years, but the stock is trading at $38.30, with an average price target of just $39.24. Both stocks are in decent shape, but they will both need the overall market to move higher in order to enjoy any sizable gains of their own.


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Pfizer and Chevron turn in respectable years but fell well short of the overall market

In most years, the returns booked by sector leaders Pfizer (PFE) and Chevron (CVX) would be fantastic, but with gains of 15.5% and 10.0% respectively, both stocks wound up underperforming the broader market by wide margins. The year was good for Pfizer, with shares steadily rising through the year, but the stock was just not able to keep pace with the overall market. The outlook remains bright for the stock though, and shares should continue to enjoy slow gains moving forward. PFE has a P/E of 22.3, and analysts expecting average earnings growth of 5.9% over the next five years. The stock trades at $36.22, with an average price target of $39.90. Oil and gas giant CVX was weak during the first half of the year, but as oil prices rose during the latter part of the year, so did CVX, which is currently just pennies below its 52-week high. The stock has a P/E of 36.4, and analysts see earnings growth of 60.1% per annum over the next five years. The stock trades at $125.19, with an average price target of $132.00.


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Verizon and Merck wind up near break-even for the year

Telecom leader Verizon (VZ) managed to end the year up 3.5%, but had it not been for the stock’s large dividend, investors would have lost 0.8% during the year on their position. Merck (MRK) also benefitted from its dividend, but even with the income, the position ended up in negative territory for the year, down 1.2%. VZ would have been much worse were it not for a late year rally that brought the stock near break-even. VZ has risen sharply over the last month, but even with the recent rise, its P/E remains low at 13.5, but the telecom sector is fairly saturated and competitive, and as such growth is stagnant. VZ is forecast to grow earnings by just 1.5% per annum over the next five years, so even the stock’s low valuation will not attract investors unless the company is able to figure out a way to post stronger than expected growth moving forward. MRK took a bit hit in October due to disappointing quarterly revenues and the company announcing it had withdrawn its European application for its cancer drug Keytruda. The stock has begun to recover, but sentiment remains bearish. Even with the sell off, the stock has a P/E of 54, so it will be difficult for the security to make back a meaningful amount of its recent losses.


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IBM and Exxon finish the year in the red

International Business Machines (IBM) enjoyed a little rally during the latter part of the year, but the company’s underlying weaknesses have been a drag on the stock, with the position closing out the year down 4.0%. The company has reported year over year revenue declines the last 22 quarters, and until it is able to prove to Wall Street an ability to grow sales traders will continue to be weary of its outlook. IBM has a low P/E of 12.8, but earnings fell by 6.2% on average over the last five years, and are forecast to rise just 2.3% per annum over the next five years, so the outlook remains muted at this point. Exxon Mobil (XOM) rose during the final quarter in sympathy to higher oil prices, but even with the recent gains the position closed out the year down 3.9%, including dividends. The stock will most likely continue to trade in relation to oil prices, which are unpredictable, and could start to fall at any point. Earnings have fallen on average 23.8% over the last five years as oil prices crashed in 2014, but the worst is behind the sector, and analysts expect to see Exxon grow earnings by 20.6% per annum over the next five years. The stock trades at $83.64, and analysts have an average price target of $87.58 on the stock.


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Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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