The Dow widens the gap on the Dogs

 

When we lasted reviewed this year’s Dogs of the Dow, the group was down 4.2% while the Dow Jones was in the red by 2.3%. At the current time, this year’s stocks in the Dogs of the Dow are down an average of 4.1% while the Dow Jones is in the red just 1.7%.

The biggest shake-up in the Dow in a long while was the removal of General Electric from the index, but the stock will remain in our group, and unfortunately it continues to weigh down the rest of this year’s stocks.

The strategy involves buying the ten stocks in the Dow Jones with the highest yields at the start of the year and holding those positions through the year regardless of performance, with the idea being that their yields were so high because the stocks themselves were undervalued at the start of the year and would appreciate as investors push the valuations higher.

The strategy has worked perfectly in recent years, but this year the group has struggled to keep pace the overall market for most of the year.

With a big loser in General Electric, which is down over 25% over the year, and only three of the ten stocks showing gains for the year, it has been a tough year for the group. The overall market has been weak, but our stocks have done worse, and if it were not for the positive impact of their dividends, the group would be down even more at -5.7%.

Let’s take a closer look at this year’s group to spot the areas or strengths and weaknesses.

Cisco Systems and Merck remain strong

Cisco Systems (CSCO) and Merck (MRK) remain on top of this year’s group. Cisco Systems is up 10.0%, while Merck has appreciated 9.8% year to date. Cisco gave back some of its gains over the last month, as China is important to the company and the market is a little weary of companies with Chinese exposure as trade war tensions heat up between the world’s two largest economies. The outlook remains bright, but with the China uncertainty in the market, it will be hard for the stock to stage a rally while the U.S. and China continue to flex their muscles. Merck has trended higher for the last several months, although it did hit some solid resistance around $62 that it was unable to break. The stock will likely just trade in sympathy to the overall market until it next reports earnings July 31.


Charts courtesy of www.stockcharts.com

Pfizer and Chevron remain near break even

Both Pfizer (PFE) and Chevron (CVX) are pretty much unchanged from the last time we checked in on them. Drug maker Pfizer is currently up a modest 1.6% while on the year, while oil and gas giant Chevron is down 2.0%. PFE has kept a sideways trend during the market volatility, and will likely continue to do so. The market has been volatile mainly in reaction to ongoing trade war fears, but the underlying economy remains strong, and if China and the U.S. are able to come to a deal, the overall market should start to show strength again. Don’t expect PFE to move too much in either direction until the market finds its footing. Chevron, as always, will be mostly sympathetic to oil prices. Oil has cooled off a bit, so it is not surprising that CVX has lost some ground over the last month. As we enter the middle of the high demand summer driving months, I would expect oil prices to stabilize and allow CVX to move closer to break-even for the year.


Charts courtesy of www.stockcharts.com

Coca-Cola and Exxon in the middle of the pack

Soft drink maker Coca-Cola (KO), and oil and gas leader Exxon (XOM) are currently down 3.4% and 3.9% respectively. KO is currently trending higher after hitting a 52-week low in mid-June, but the market remains weary of the company as consumers are staying away from sugary soft-drinks. The big shift in the U.S. away from soft drinks in favor of water, teas, and energy drinks, will continue to weigh on the company, which has to rely on international growth and growing its snacks business to compensate for the change. Don’t expect any huge moves from KO ahead of its July 25 earnings report. XOM enjoyed a brief rally at the start of the second quarter, but as oil prices have cooled off, so has the stock. Shares are currently trending lower, but if we see stability in the oil market, XOM has a lot of upside. Look for XOM to trade relative to oil prices through the summer months.


Charts courtesy of www.stockcharts.com

Verizon and IBM

Verizon (VZ) and IBM (IBM) have both been weak all year and remain so with VZ down 5.2% and IBM losing 7.6% on the year. Verizon has been stuck in a sideways pattern for the last four months, and the stock will likely remain stuck in that trend until the overall market decides which direction it wants to head. Verizon is in a highly competitive market, with analysts expecting earnings to rise just 2.2% next year. The stock does have a low valuation, with a forward P/E of just 10.5, but the anemic growth estimates will keep the stock rangebound unless the overall market starts to move higher and pulls the stock with it. IBM’s turnaround plan continues to show weakness. Moving into more cloud and AI services has been the company’s focus in recent years, but the gains it has made in those areas has not been enough to outweigh declines in its enterprise business. Wall Street remains bullish on the stock, and until the company is able to show material improvements the stock will likely continue to underperform the market and pull the dogs lower.


Charts courtesy of www.stockcharts.com

Procter & Gamble and General Electric remain at the back of the pack

The biggest news from this set of stocks is the fact that General Electric (GE) was removed from the Dow Jones on June 26, to be replaced by Walgreens Boots (WBA). GE has been weak for the last year, and continues to show weakness with the stock near its 52-week low, and down 27.6% on the year. Consumer goods maker Procter & Gamble (PG) is holding up better, but the position has lost 12.9% year to date, so it is definitely dragging down the overall group. The market has been incredibly bearish on GE, as earnings fall and the company struggles to find its footing. PG has struggled with per annum earnings growth of just 0.3% over the last five years, but it does appear to be moving in the right direction, with analysts expecting profits to rise by 6.9% this year, and 7.0% per annum over the next five years. PG started to move higher over the last month, but the company will need a strong quarterly report on July 19 for shares to build on their recent gains.


Charts courtesy of www.stockcharts.com

Symbols: CSCO CVX GE IBM KO MRK PFE PG VZ 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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