How are the Dogs Handling the Market Volatility?

 

The broader market has turned lower over the last two weeks as increased trade and currency tensions drive the major indices lower.

The trade war between the U.S. and China escalated after the U.S. announced new tariffs on China and China briefly allowed its currency to devalue passed the benchmark 7 mark. China’s currency move rattled markets which have started to price in the possibility of a global currency war.

Those fears were stocked on August 7 when three new countries lowered their interest rates.

Investors are starting to panic over fear of a global economic recession, and there is a lot of profit taking as fears rise.

We have been tracking the Dogs of the Dow this year, and now is good time to check in on the strategy which involves buying the top-ten yielding stocks in the Dow Jones at the start of the year and holding each position for the entire year and collecting the dividends for the full year.

So, how are the dogs doing? The Dow Jones is currently trending lower but remains up 9.8% on the year. Our ten stocks in this year’s Dogs of the Dow are currently slightly outpacing the overall market with a gain of 10.6%, including dividends. Excluding dividends, our stock would be underperforming, with a collective gain of just 8.6%.

** note: All returns include dividend payments.

Procter & Gamble and IBM

Procter & Gamble (PG) is currently the best performing stock in the group, with a year to date gain of 25.9%. The stock has pulled back a little during the overall market selloff but remains in the upper end of its 52-week range. The company delivered big beats on both the top and bottom line in its recent quarterly report, sending shares sharply higher and as volatility eases in the overall market you can expect PG to quickly regain its strength. PG trades at $113.07 with an average price target of $114.21.

Int’l Business Machines (IBM) is our second-best performer with the position up 23.4% year to date. IBM has delivered a string of better than expected quarterly reports and earnings and Wall Street has turned more optimistic in the company as it attempts to reinvent itself in the current landscape. Last quarter the company showed year over year earnings growth of 2.9% while sales were down 4% versus the same period last year. The stock was trading at a 52-week high just before the overall market turned lower, and is currently trading at $137.60 with an average price target of $156.23.

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Cisco and JP Morgan

Cisco (CSCO) is next on the list with a year to date gain of 21.6%, well above the overall market. CSCO delivered better than expected top and bottom line results last quarter, and the company will report its next set of quarterly numbers on August 14. Analysts expect earnings of 82 cents per share, versus $0.70 during the same period last year. Cisco continues to grow and analysts forecasts annual earnings growth of 8.7% for the next five years. The stock trades at a reasonable forward P/E of 15 and the stock should trade back to its 52-week high as the market regains its footing. CSCO trades at $52.04 with an average price target of $57.31.

Banking giant JP Morgan Chase (JPM) has appreciated 12.3% on the year. JPM hit a 52-week high just before the overall market sold off over the last two weeks after posting a positive earnings surprise mid-July. Q2 earnings of $2.82 per share were up from $2.29 during the same period last year. The stock trades at less than 11 times earnings at $106.54 and analysts have an average price target of $122.60.

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Coca-Cola and Merck

Soft drink giant Coca-Cola (KO) is trading near its 52-week high with the position outperforming the stock with a 12% gain on the year. Coca-Cola is coming off its second straight quarter with better than expected results on both the top and bottom line. Earnings growth has been modest for the sector, but looking ahead analysts expect Coca-Cola to grow its earnings at an annual 5.2% rate over the next five years. Analysts continue to see upside with an average price target of $55.67 versus today’s price of $52.96.

Pharmaceutical company Merck (MRK) has been a solid performer over the last year, and the position is currently up 10.9% on the year. MRK hit a 52-week high just prior to the market selloff, but it has been less impacted than most of the market. MRK is now trading just 3.3% below its 52-week high despite the market volatility, and shares should return to their previous highs as the market firms.

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Chevron and Exxon Mobil

Chevron (CVX) has also outpaced the overall market in 2019, with our position up 10.3% year to date. CVX has been one of the strongest stocks in the oil and gas sector, and the company reported better than expected Q2 earnings at the start of July, while revenues fell short of the consensus. The revenue miss could hurt the stock, which at the moment is already trading lower as oil investors have grown weary of the global economy and the impact a slowdown would have on energy demand. CVX’s performance will be impacted by oil prices, which remain volatile but would stabilize if progress is made in trade negotiations. CVX trades at $118.11 with an average price target of $137.83.

Exxon Mobil (XOM) has appreciated on the year, but the stock’s 4.8% year to date gain underperforms the overall Dow Jones which is up 9.8% year to date. Exxon reported a disappointing set of quarterly numbers in April which put the stock in a downward trend which it had started to reverse before trade tensions hit the overall market. XOM trades at just 11 times earnings which are expected to rise at an annual rate of 11% over the next five years. The strong growth and low valuation should drive the stock higher, but its movement moving forward will be more closely tied to oil, and how the oil market responds to the current trade and currency wars playing out. XOM trades at $69.94 with an average price target of $84.20.

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Verizon and Pfizer

Telecom giant Verizon (VZ) is sitting just above break even for the year with a gain of 0.5%. Excluding the positive impact of dividends VZ would be 1.7% in the red. The company is in a fiercely competitive market, and earnings growth is expected at a modest 2.8% per annum over the next five years. The stock is trading at 11 times future earnings, which is attractive, but 2.8% earnings growth is going to weigh on the stock moving forward unless the company is able to consistently show better than expected quarterly numbers. The company posted mixed numbers on August 1 with a positive earnings surprise on weaker than expected revenue. The stock was little moved on the report, but analysts remain bullish on the stock’s outlook. VZ trades at $55.23 with an average price target of $60.51.

Drug maker Pfizer (PFE) continues to be the only stock in the group that has fallen in the current year, and the position is currently down 15.1% year to date. Pfizer had been maintaining a sideways trend before the stock gapped sharply lower at the end of July after the company posted mixed quarterly numbers but a miss on the top line. The stock took a big hit, and shares are now trading at just 13% future earnings which should help build a level of support and limit significant additional downside in the stock. PFE trades at $36.54 with an average price target of $44.14.

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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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