Dogs of the Dow: These dogs keep running!

 

It has been a good year for the Dogs of the Dow. The group has been strong through the course of the year, and since we last looked, it has extended it lead its over the broader market.

As of July 11, the Dow Jones is up 4.7%, while the positions in this year’s group have an average gain of 16.5%, including dividends.

The group is being led by strength in the utilities sector, but this year’s gains for the oil and gas sector is also driving results higher.

In fact, every single stock in the group is in positive territory, and in an unusual situation, even the worst performing stock in the group has greatly outperformed the overall market.

For those unfamiliar with the Dogs of the Dow strategy, the basic idea is that an investor would purchase an equal dollar-weighted position in each of the ten stocks in the Dow Jones with the highest dividend yield at the start of the year, and hold those positions, regardless of performance, for the entire year. The reasoning behind the strategy is that the stock’s yields rose in reaction to the underlying securities being undervalued, and through the course of the year, the price would rise to fair value.

Historically, the strategy has not always worked, but it has proven successful the last few years, and this year in particular the strategy is working perfectly, with the group outperforming the market by 11.8%.

We want to take a closer look at each stock in the group, and see how they are faring ahead of the upcoming earnings season.

Verizon

Telecom giant Verizon (VZ) continues to outperform the overall market, and the position is currently the top performer in our group. Including dividends, our VZ position is now up 24.6% on the year. The stock’s next distribution will be made on August 1, which will boost the position’s return slightly. Verizon will next report earnings on July 26, with the consensus calling for earnings of $0.95, down from $1.04 during the same period last year. Even with the stock’s impressive gains this year, the valuation remains attractive, with a P/E of just 12.6, so a solid earnings report should result in additional gains for the stock.

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Chart courtesy of www.stockcharts.com

Chevron

Strength in oil this year has resulted in solid gains for the large oil and gas stocks, and Chevron (CVX) is currently up 19.0% on the year, including dividends. Oil has rebounded from its selloff last year, and with future interest rate hikes unlikely at this time, chances are good that oil will remain strong as global currencies weaken post-Brexit. Commodities in general have been strong this year, and oil is forecast to remain in a $45 to $50 range for the remainder of the year. Chevron will next report earnings on July 29, with the street expecting quarterly earnings of $0.27 per share. The stock is just pennies below its 52-week high, and trades with a P/E of 153, so the upside is likely limited at this point until earnings start to climb as a result of higher oil prices. Earnings are forecast to fall 64% for 2016, but next year analysts expect earnings growth of 295%, which is why the stock is trading at such a high multiple.

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Chart courtesy of www.stockcharts.com

Caterpillar

Improvement in the commodities sector has led to a resurgence in Caterpillar (CAT) shares, with the position currently up 17.1% on the year. Metals and mining has been strong, as has the oil and gas sector, which in turn boosts heavy-machinery maker Caterpillar. The company also benefits from a strong housing market, and overall strength in the broader U.S. economy. The stock is trading in the upper end of 52-week high range, and has a P/E of 41.0. Future growth is a concern, with earnings forecast to fall 23.9% this year, and rising just 0.6% next year. The valuation is a primary reason the stock has failed to break through resistance on multiple occasions around the $78.00 level. If the stock is able to trade above $78.00 and hold, it should begin to use that as a future level of support. Until that happens the stock is unlikely to build on its recent gains. The company will next report earnings on July 26, with the consensus calling for earnings of $0.97 per share. CAT will make its next distribution on August 20.

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Chart courtesy of www.stockcharts.com

International Business Machines

International Business Machines (IBM) was up 11.2% when we last looked at the position, and the stock has inched slightly higher, and the position is now up 14.2% on the year. The stock has been trending higher after a post-Brexit sell off, and the stock recently broke through a solid level of resistance at $155.00. The company will next report earnings on July 18, and its quarterly results will determine whether or not the stock pulls back below resistance, or starts to use $155.00 as a new level of support. Analysts have a $144.18 price target on the stock, which is a big reason why the stock has been unable to break through resistance. IBM has a P/E of 11.8, so valuation is not a big concern, but earnings are forecast to fall 9.6% this year and rise just 4.4% next year. With the earnings forecast, and the stock trading above the average price target, its Q2 earnings numbers will need to be strong for the stock to build on its gains from earlier in the year.

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Chart courtesy of www.stockcharts.com

Exxon Mobil

Like the entire oil and gas sector, Exxon Mobil (XOM) has enjoyed a breakout year in 2016, as oil prices have rebounded from last year’s sell off. Our XOM position was up 17.9% when we last looked at the group, but the stock has built on previous gains, and including dividends, the position is currently up 22.1% on the year. Oil has been volatile in recent years, but analysts forecast the precious crude will remain in a trading range of $45 to $50 a barrel through the remainder of the year, which should prevent oil and gas stocks from giving back their recent gains, but may also limit the upside potential considering the strong gains already enjoyed this year. XOM shares have a P/E of 30.4, which limits the stock’s upside, especially considering analysts forecast earnings to fall 29.1% this year. Looking ahead, analysts expect earnings to rise 64.1%, and if the company is able to hit its forecast, the stock will trend higher. Exxon will next report earnings on July 29, with the consensus calling for earnings of $0.61 per share. During the same period last year the company earned $1.00. XOM will make its next dividend payment mid-September.

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Chart courtesy of www.stockcharts.com

Pfizer

The pharmaceutical sector has been strong in recent months, and with Pfizer (PFE) stock recently hitting a 52-week high, our position is up 13.6% on the year. Pfizer is scheduled to report its second-quarter results on August 2, with analysts expecting earnings of $0.63 per share. During the same period last year, the company earned $0.56 per share. PFE is currently trading at $36.29, slightly lower than the street’s $38.67 price target. The price target suggests additional upside in the stock, but with a P/E of 29.7, the stock is unlikely to continue rising as sharply as it has over the last few months. There is also the possibility that rising drug costs will be a major talking point as the presidential election nears, which will apply pressure to the overall sector and could easily drive shares of the big pharmaceutical companies lower. PFE shares are priced for perfection, and unless its Q2 numbers shatter estimates, I see limited upside in the stock during the second half of the year

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Chart courtesy of www.stockcharts.com

Merck

Merck (MRK) has benefited from strength in the overall pharmaceutical sector, and with recent gains, the position is up 14.0% on the year. The stock is now trading just shy of its 52-week high at $59.68, and shares are approaching Wall Street’s $61.45 average price target. With a P/E of 36.6, and earnings forecast to rise just 3.6% this year and 1.1% next year, shares could run into resistance soon unless the company posts a strong earnings beat on July 29. Analysts forecast Q2 earnings of $0.91, up from $0.86 during the same period last year. The stock has enjoyed strong gains during the first half of the year, but with the current valuation and weak earnings growth forecasts, I expect to see the stock trade sideways ahead of the upcoming report. The political landscape is uncertain at this time, and rising drug costs are likely to be a major talking point in the presidential election which could erase some of the gains that the sector has enjoyed in recent months.

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Chart courtesy of www.stockcharts.com

Procter & Gamble

Procter & Gamble (PG) is trading just pennies below its 52-week high, and the position is now up 9.3% for the year, including dividends. A strong dollar has hurt the company’s bottom line, but it has done a good job cost cutting to counter balance the impact of the strong dollar overseas, which will pay dividends down the line as the dollar weakens from its current level. Analysts forecast earnings to fall by 3.2% this year, but Wall Street has been willing to overlook the earnings decline and drive the stock’s P/E up to 27.0. The company will report its next set of quarterly results on August 2, with Wall Street expecting earnings of $0.74 per share, down from $1.00 during the same period last year. The earnings drop has already been priced into the stock, so as long as the results are in-line or better with the consensus, PG shares should trend higher and trade up to a new 52-week high. The stock is now trading at $85.93, and analysts have an average price target of $84.68, so the stock has likely exhausted its upside potential ahead of the earnings report. Shares are likely to trade sideways until the quarterly results are posted.

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Chart courtesy of www.stockcharts.com

Wal-Mart

Wal-Mart (WMT) has been a top performer in 2016, with shares rallying following last year’s sell off. The stock got punished last year, as traders drove down the stock in reaction to the company’s move to boost its minimum wage, and invest heavily in its e-commerce business. Our position was up 17.1% when we last looked at our group, but the stock has continued to build on recent strength, and including dividends, the position is now up 21.9%, making it the third-strongest stock in the group. The stock’s P/E is still attractive at 16.4, but with earnings forecast to fall 7.2% this year, the upside may be limited at this time. The stock is trading just pennies below its 52-week high, and Wall Street has an average price target of $69.19 on the stock. With shares trading at $74.26, the stock is likely going to trade sideways ahead of its next earnings report on August 18. Analysts forecast earnings of $1.02, down from $1.08 during the same period last year. The last earnings season showed that consumers were still spending, but the best results were reported by discount retailers such as Wal-Mart. If the same trend emerges in the upcoming earnings season, Wal-Mart should show solid results, and the stock will trend higher on the results. The company will make its next dividend distribution on September 6.

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Chart courtesy of www.stockcharts.com

Cisco Systems

Cisco Systems (CSCO) continues to build on its strong quarterly report in May, with the position up 9.9% on the year, and trading just pennies below its 52-week high. The stock’s valuation remains attractive, with a P/E of 14.5, and earnings forecast to rise 5.4% this year, and 4.3% next year. CSCO shares are trading at $29.44, which is slightly below the $30.92 average price target on the stock. Cisco will next report earnings on August 17, and if the company is able to post another set of impressive numbers, shares will move higher, but until its report the stock is likely to trade sideways as Wall Street awaits the results. Analysts forecast earnings of $0.55 per share, down from $0.59 during the same period last year. The company will make its next distribution on July 27, which will boost the return slightly.

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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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