Dogs of the Dow outrunning the market

 

The market has trended lower since we last checked in on this year’s Dogs of the Dow, and while both the overall market, and our collective group of stocks have given back some gains from earlier in the year, the Dogs have fared better.

At our last checkup, the Dow was up 2.1%, with the Dogs appreciating 8.0%. As of May 16, the Dow is up a modest 1.1%, with the Dogs of the Dow falling to a 7.7% gain for the year.

The results would have been worse for our group if it were not for three dividend payments received over the last month.

The market has yet to really bounce from its recent selling pressure, but now that we are mostly finished with earnings season I expect to see stability return to the overall market, and stocks to slowly erase some of their recent losses.

Remarkably, all ten stocks in this year’s group are currently trading in positive territory for the year. Almost as remarkable is the fact that Exxon Mobil (XOM) is the top-performing stock in our group. After a very disappointing year for oil investors, strength has returned to the sector, and all the major oil and gas stocks have been strong performers.

Let’s take a closer look at all ten stocks in this year’s group and how each has contributed to the group’s collective performance.

Verizon

Verizon (VZ) was up 11.1% when we last looked in on our group, but the position has moved slightly higher, and is currently up 13.8%. Helping the gain was the stock’s second dividend distribution for the year. The company reported Q1 earnings that were in-line with the consensus on April 21, but revenues were slightly weaker than expected. The stock has traded up slightly since that report, but has mostly been stuck in sideways pattern over the last few weeks. The stock has a low valuation, with a P/E of just 11.5, so there is still plenty of upside potential once strength returns to the overall market.

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Chart courtesy of www.stockcharts.com

Chevron

Like all the major oil and gas stocks, Chevron (CVX) has enjoyed a breakout year in 2016, with our position currently enjoying a 14.0% gain for the year. The stock topped out in late-April, but shares remain just shy of the all-time high. Stability has returned to oil prices, and as long as oil does not run into additional weakness, I see the entire sector continue to trend higher. The company’s Q1 earnings were disappointing, but revenue was well above the consensus. The solid revenue number has kept the stock from enduring a steep post-earnings sell off, and the stock should continue to trade in sympathy to oil prices.

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Chart courtesy of www.stockcharts.com

Caterpillar

After several strong months, heavy machinery maker Caterpillar (CAT) has run into weakness once again over the last month after a disappointing earnings report on April 21. The most damaging part of the report was the company’s forward guidance. It slashed its full-year guidance to $3.70 per share, down from its previous $4.00 forecast. While it cut its full-year profit forecast, it did not that it was seeing improvements in the all-important Chinese market. The stock has yet to find support post-earnings, but the position remains up 6.0% on the year, thanks to the solid gains it enjoyed in February and March. Commodities have improved this year, which helped the stock earlier in the year, and if we see increased strength in commodities, the stock could quickly recover its recent losses and resume its upward trend. The stock’s P/E has ballooned to 37.4, so there is a valuation concern, but the real driver of the stock will be updated conditions in China, and the fate of the overall commodities market.

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Chart courtesy of www.stockcharts.com

International Business Machines

Shares of International Business Machines (IBM) have stalled out over the last month, but thanks to gains from earlier in the year, the position remains up 8.5% for the year. The recent sideways trend the stock has endured is mostly a reaction to the overall market. The company reported solid quarterly results mid-April, topping estimates for both the top and bottom lines. Despite the strong numbers, the stock sold off, a reaction to the company’s 16th straight quarter of revenue declines as it advances on its turnaround program. IBM is focused on growing its cloud-based solutions, and Wall Street expressed its frustration with the speed at which the changes are impacting revenue. Since the initial sell off, shares have managed to make back some of the post-earnings loss, and I expect Wall Street to stay behind the stock and focus on its better than expected results. The stock has a very low P/E of 11.3, so the downside appears to be very limited at the current time. The company will make its next dividend payment on June 10, which will help give the position a little boost.

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Chart courtesy of www.stockcharts.com

Exxon Mobil

Exxon Mobil (XOM) stands as the top performing position in our group, enjoying a hefty 15.2% gain on the year. The stock has made one dividend distribution, with the second payment scheduled for June 10. The company reported earnings at the end of April, easily topping estimates on both the top and bottom lines. The upbeat report pushed shares higher, and XOM is now sitting just pennies below the 52-week high. The stock’s P/E has risen to 28.8, so we could see Wall Street put a ceiling on the stock, but as long as oil continues to strengthen the stock should trend higher.

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Chart courtesy of www.stockcharts.com

Pfizer

Pharmaceutical giant Pfizer (PFE) was down 6.9% for the year when we last checked in this year’s group of stocks, but strength has returned to the sector, and our PFE position is currently up 3.9% for the year. The gain was partially fueled but the stocks better than expected quarterly report at the start of May. Pfizer easily surpassed estimates for both the top and bottom lines, and the stock responded favorably. PFE is currently trading with a P/E of 27.2, so there may be a limited amount of upside from the current level. Analysts do forecast earnings growth of 10.9% this year, and 7.0% next year, so there is reason to expect shares to trend higher as long as the company is able to hit its growth forecasts. The stock will make its second distribution for the year on June 1.

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Chart courtesy of www.stockcharts.com

Merck

Merck (MRK) was down 6.9% the last time we looked at the stock, but since then shares have trended higher, and the position is now up 3.5%. The gain was partially aided by the stock’s first dividend payment in early April, but it will not pay another dividend until July. The company reported better than expected quarterly earnings during the first week of May, but revenue did lag the consensus slightly. The stock has been in a sideways pattern since the earnings report, and will likely look for direction from the overall market. The stock’s valuation is a bit of a concern, with a P/E of 33.4, versus the industry average 23.6. Analysts forecast modest earnings growth of 3.6% this year, and 0.8% next year, which in conjunction with the stock’s valuation will likely prevent shares from appreciating too much more from their current value. As such, I would expect MRK to trade in sympathy with the overall market through the summer until its next earnings report.

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Chart courtesy of www.stockcharts.com

Procter & Gamble

Procter & Gamble (PG) has been a solid performer all year, but the position is down just slightly from its 4.1% gain the last time we examined our group, and has currently appreciated 4.0% for the year. The stock is still outperforming the overall market, but has been stuck in a sideways pattern since early March, and a mixed fiscal Q3 report in April did little to move shares. The company beat on the bottom line, but revenues were slightly weaker than expected. The strong dollar continues to weigh on revenues of big, multi-national stocks, so the revenue miss really did not come as much of a surprise, and is the reason the stock did not move significantly lower on the news. PG is a stable stock due to the nature of its consumer staples business, and a true dividend aristocrat, with 3.3% dividend yield, and a 59-year streak of dividend increases. The stock has a P/E of 25.7, which may prevent the stock from moving much higher, especially considering analysts forecast an earnings drop of 3.5% during the current year. The company just made its second distribution for the year on May 16, so the next payment will not occur until mid-August.

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Chart courtesy of www.stockcharts.com

Wal-Mart

Mega retail giant Wal-Mart (WMT) has come to life in 2016 after a disastrous 2015, and while shares have trended slightly lower over the last few weeks, the position remains up 7.4% on the year. The company has a big test ahead of it when it reports its next set of quarterly numbers on June 3, with analysts forecasting earnings of $0.88 per share, down from $1.03 during the same period last year. Wall Street beat up the stock last year, mostly in reaction to the company’s move to increase its minimum wage, as well as increased spending to boost the company’s e-commerce business. E-commerce is a growing importance for the company, so Wall Street will look for clues as to the progress the company is making in its fierce battle against e-commerce giant Amazon.com (AMZN). The street will be willing to overlook the year over year earnings drop as long as the company is able to hit the street’s estimate, and show signs of strength for its online business. The stock has a favorable valuation, with a P/E of just 14.4, so there is plenty of upside potential on an upbeat report.

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Chart courtesy of www.stockcharts.com

Cisco Systems

Cisco Systems (CSCO) has been the most volatile stock in our group, and shares are currently in a sharp downwards trend. Even with the recent selling, the stock is up a meager 0.6% on the year, making it the worst performing stock in our group. However, we expect a big move when the company reports its fiscal third-quarter results after the market close on May 18. Analysts forecast earnings of $0.55 per share, but the street’s whisper number is slightly higher at $0.57, which suggests we can expect an earnings beat, and for the stock to make a meaningful move higher, the quarterly earnings need to be at least $0.57. After the company reported solid numbers in February, the stock make a big move to the upside, and we could see another such move following its Q3 results. The stock has a low valuation, with a P/E of 13.3, and analysts forecast modest earnings growth of 4.1% this year and 3.5% next year. One of the company’s closest competitors, Juniper Networks (JNPR) already reported its quarterly results, and the numbers were disappointing. The stock moved lower, and pulled CSCO shares down in sympathy. The good news is that if CSCO does disappoint, a lot of the downside has already been priced into the stock, but an earnings beat will help shares quickly erase a significant amount of its recent losses. The company made its second dividend payment on April 27, so investors will not get another payment until late July.

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Chart 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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