Dogs of the Dow continue to lag overall market – Part II

 

This is the second half of our two-part series taking a look at this year’s Dogs of the Dow.

As we discussed in part one of our discussion yesterday, this is the first year since we started tracking the strategy four years ago that the Dogs of the Dow have not been outpacing the overall market.

Year to date, the Dow Jones has appreciated by 7.6%, but the stocks in this year’s Dogs of the Dow have risen, on average, just 4.9% (including dividends).

The strategy is pretty straightforward. At the beginning of the year, you buy an equal dollar-weight amount of each of the top 10 yielding stocks in the Dow Jones, with the intent of holding all 10 stocks through the course of the year, regardless of individual performance. The idea is that the stocks’ yields have risen as high as they high because the underlying security is oversold and should rise more than the overall market through the course of the year.

As is always the case, there are a few stocks that are greatly outperforming the overall market, while others are underperforming and dragging down the overall group.

We took a look at the first five stocks yesterday, and today we want to dig a little deeper into the second half of the group and pinpoint which of these stocks are helping, and which are dragging down the overall group.

Coca-Cola

Soft drink giant Coca-Cola (KO) is one of two new stocks in to join the Dogs of the Dow this year, and so far it has been a help to the overall group. The stock has appreciated 10.3% on the year, and so far has only made one dividend payment. The second distribution will be paid on July 3, which will give the position an even slightly higher return. The company has been fighting a shift in consumer taste away from sugary soft drinks, but increased focus on non-soft drink products has helped keep momentum under the stock, which is currently trading just shy of its record high. Valuation is a slight concern, with a P/E of 31.8, and earnings expected to fall 1.0% this year before rising a modest 4.8% in 2018. The stock has been strong, but based on the valuation and EPS growth estimates, it could have limited upside potential at this point. Analysts seem to agree, with an average price target of $45.44, versus its current price of $45.15. The company will next report earnings on July 26.

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Chart courtesy of www.stockcharts.com

International Business Machines

International Business Machines (IBM) has struggled all year, and currently the stock is down 4.8% on the year. Things took a turn for the worse in mid-April after the company reported another revenue drop, something it has done for 20 straight quarters at this point. Sentiment is bearish on the stock at this time, but the stock’s valuation could limit its downside at this time. The stock has a P/E of 12.8, and analysts see earnings rising just 0.8% this year and 1.7% in 2018. The company has been cutting costs in order to combat falling revenues, but Wall Street remains unconvinced that its turnaround program is progressing quickly enough to warrant driving the stock higher. Analysts do have a price target of $167.81 versus a current price of $155.24, so there is some hope that the stock will erase some of its recent losses, but until the company is able to show Wall Street it is capable of growing sales it would be tough to get behind the stock and expect Wall Street to take a bullish stance.

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Chart courtesy of www.stockcharts.com

Exxon Mobil

Exxon Mobil (XOM) has underperformed through the year, and the stock is currently down 8.6%, and trading in the lower end of its 52-week range. Oil has been falling through the year, but it does appear to have found some support in the lower $40 a barrel a range. If oil is able to trend higher through the summer months, XOM should start to erase some of its recent gains, but if we see crude remain range bound it will be very difficult for XOM to stage a meaningful comeback any time soon. XOM has already made two dividend payments during the year, and the shareholders should not expect another distribution until early September. Exxon is expected to grow earnings nicely this year by 63.7%, and by 16.0% next year, but actual results could come in well below estimates if oil moves lower through the latter part of the year. The stock has a P/E of 34.0, so the stock is priced for perfection, and it will need to be perfect in order for investors to enjoy a nice recovery during the second half of the year. XOM will next report earnings on July 28.

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Chart courtesy of www.stockcharts.com

Caterpillar

Heavy machinery maker Caterpillar (CAT) has been very strong over the last year, and with the position up 13.7% on the year, including two dividends; it is the second best performer in this year’s group of stocks. The stock’s initial recovery began early in 2016 as commodities started to improve, and lately the stock has been fueled by President Trump’s intention to boost federal spending on infrastructure and his plan to build a wall on the Mexican border. The stock forward P/E of just 19.8, and analysts expect earnings growth of 20.8% this year and 27.8% in 2018. The valuation and robust earnings growth estimates should be enough to keep strength under the stock as long as the company is able to hit its future estimates. CAT is coming off four straight quarters of better than expected earnings, and the company will next report earnings on July 25.

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Chart courtesy of www.stockcharts.com

Merck

Pharmaceutical leader Merck (MRK) has been in an upward trend all year, and including the company’s sole dividend payment on the year, the position is now up an even 13.0% year to date. The company’s most recent quarterly report came on May 2, with results topping estimates on both the top and bottom line, which drove shares even higher. The stock is currently trading just pennies below its all-time high, but valuation has become a concern. MRK has a P/E of 42.0, and earnings are expected to rise just 1.6% this year, and 8.9% next year. Valuation may be a concern, but analysts continue to see a little upside in the stock. Analysts have an average price target of $68.00, versus its current price of $65.98. Wall Street remains bullish on the stock, and as long as the company does not report any negative earnings surprises during the second half of the year, the stock should continue to outpace the overall market. The company will make its second dividend payment on July 1, and will report its next set of quarterly numbers on July 28.

mrk170627

Chart courtesy of www.stockcharts.com

Symbols: CAT IBM KO MRK XOM
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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