Dogs of the Dow pull even with the market

 

For the first time in the four years that we have tracked the Dogs of the Dow strategy, 2017 has seen the strategy fail to keep pace with the overall market. Each time we have checked in with this year’s group of stocks that have lagged the overall market, but that has changed, and the group has pulled basically in-line with the overall Dow Jones at this point.

On the year, the Dow Jones has appreciated 11.2%, and the stocks in this year’s group of Dogs are currently showing a profit of 11.0%, including dividends.

While there is still plenty of time left before the end of the year, it now appears as though we could see another year where the Dogs of the Dow strategy is able to win versus the overall market.

For new readers, the Dogs of the Dow strategy involves buying an equal dollar weighted amount of each of the top ten yielding stocks in the Dow Jones at the start of the year, and holding those positions, regardless of performance, through the course of the year. The idea being that the stock’s yields rose so high because the underlying security was in oversold territory, and as investors bought into the perceived value in the stocks shares would rise and the group would collectively be able to outpace the overall market.

Let’s take a closer look at the stocks in this year’s group, and which are helping and which are dragging on the overall group.

Boeing and Caterpillar lead the pack

The top two performing stocks in this year’s group are Boeing (BA) and Caterpillar (CAT). Boeing has had a breakout year, with shares currently up 57.3% on the year, while heavy machinery maker Caterpillar has risen 32.9%. Both positions account for three dividend payments during the year. Boeing has steadily risen as a result in improvements to the global economy helping its aerospace division, and expectations that President Trump will boost federal spending on the nation’s military. Caterpillar has trended higher in reaction to improvements in commodities, as well as expected strength from Trump’s desire to boost spending on infrastructure and a security wall on the Mexican border.

Both stocks look strong, and there is very little chance that either will not be able to close out the year ahead of the overall market.

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Charts courtesy of www.stockcharts.com

Coca-Cola and Merck lead the overall market

Soft drink maker Coca-Cola (KO) ranks number 3 in this year’s group, with a year to date gain of 14.5% including just two distribution. Drug maker Merck (MRK) is close behind with a 12.8% gain with two dividend payments. Coca-Cola has done a good job navigating a changing marketplace, as consumer shift away from sugary soft drinks, and while earnings have been moving slightly lower, they could be a lot worse, and the company has done a great job building its snack and non-soft drink segments to balance out lower soft drink sales. Looking ahead, analysts see KO growing earnings by 4.7% next year, and by 5.0% per annum over the next five years, so investor sentiment should remain bullish.

Merck, on the other hand, has been growing its earnings, and profits are forecast to rise by 8.0% next year, and by 6.2% per annum over the next five years. Both stock look a little pricey at this time, with KO trading with a P/E of 49.5, while MRK has a P/E of 35.4. Given the high valuations, I would not look for either stock to move too much higher through the remainder of the year, but both should track the overall market pretty closely as long as no major negative earnings surprises occur next earnings season.

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Charts courtesy of www.stockcharts.com

Pfizer and Cisco are tracking the market fairly closely

Both Pfizer (PFE) and Cisco Systems (CSCO) are tracking the overall market pretty closely. The Dow Jones is up 11.2% on the year, while PFE has risen 11.9% and CSCO is up 10.0%. Both Pfizer and Cisco’s returns include three dividend payments. Earlier this month PFE stock really took off on news that the FDA approved its leukemia drug. The company is forecast to grow earnings by 6.7% this year, and by 5.66% per year over the next five years. Cisco Systems was strong at the start of the year, but the stock ran into trouble after an in-line revenue report in mid-May. The stock has trended slightly higher in recent months, but remains in a very tight upward trend, and well below its 52-week high.

PFE has a P/E of 25.7, and CSCO has a P/E of 16.9. Pfizer’s valuation will likely put a ceiling on the stock for the time being, but given CSCO’s low valuation, the stock is likely to continue trending higher and erase more of its prior losses.

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Charts courtesy of www.stockcharts.com

Chevron treads water while Verizon shows weakness

Oil and gas giant Chevron (CVX) has trended higher over the last month, and the stock is close to break even on the year at this time, with the position down just 1.7% including three dividend payments. Oil stocks enjoyed major gains in 2016 as oil prices improved, but Chevron showed a lot of weakness during the first half of the year as concerns rose over OPEC’s willingness to follow through on production cuts. The stock has been strong as of late, fueled in part by a strong revenue report in late July. Second-quarter earnings were lower than the consensus, but sales were much stronger than expected, and Wall Street rallied into the stock on the mixed results. CVX has a P/E of 36.7, which is a bit high, but analysts expect earnings to rise 25.1% next year, and by 41.6% per annum over the next five years, so there is plenty of upside as long as weakness does not return to oil prices.

Verizon (VZ) rallied after its Q2 report in July, but bearish sentiment as returned to the stock, which is once again moving in the wrong direction. Fears of price competition and a saturated smartphone market have weighed on the stock, but value hunters may be tempted to push shares higher. The stock has a P/E of just 12.0, but earnings are forecast to rise just 1.3% next year, and 1.1% per annum over the next five years. I see upside for CVX, but VZ will have a hard time attracting investors due to its sluggish earnings growth.

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Charts courtesy of www.stockcharts.com

Exxon and IBM remain new 52-week lows

The two worst performing stocks in this year’s group are Exxon Mobil (XOM) and International Business Machines (IBM). Exxon has been weak all year, and while the stock is getting a little hurricane-related boost, shares are well down on the year, with the position losing 9.4%. The loss would be even greater if the company had not already paid three dividends so far this year. If oil prices move higher during the latter part of the year the stock should trend higher, but it will be tough for shares to trade up to break-even on the year, much less catch up to the overall market. IBM has struggled due to the company’s inability to grow revenues. The company has reported year over year revenue declines for 21 straight quarters. The steady sales declines has weighed on the stock, and analysts are questioning the future of the company as tries to restructure itself around artificial intelligence and cloud computing. Barring a huge revenue surprise when it next reports quarterly results in October, the stock will likely close out the year as the biggest loser in this year’s group.

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Charts courtesy of www.stockcharts.com

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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