It has been a volatile year for Wall Street as trade fears and slowing global growth continue to weight on investor sentiment.
We have seen multiple rallies and sell offs during the year, but the overall theme has been positive, with the Dow Jones up 15.4% through the end of the third quarter. We have been tracking the ten stocks in the Dogs of the Dow this year, and through the end of September the group is running in-line with the Dow Jones with a combined gain of 15.6% including dividends paid during the year.
The Dogs of the Dow is a strategy in which an investor would buy an equal dollar-weighted amount of the top ten yielding stocks in the Dow Jones at the end of the year and hold them for the course of the year regardless of performance. The idea behind the strategy is that the stock's yields have grown in size due to the stock being undervalued and shares should trade higher than the overall market as value hunters drive shares higher.
After nine months the group is even with the overall market (including dividends), and here is a closer look at how all ten are contributing the group's performance.
Procter & Gamble and IBM
Consumer goods maker Procter & Gamble (PG) is the group's top performer with the position up 37.7%, while IBM (IBM) has appreciated 32.2% in 2019. Both stocks remain in the upper end of its 52-week range, with PG trading just shy of its all-time high. Investors remain bullish on both stocks with PG expected to grow earnings at an annual rate of 7.3% over the next year and IBM forecast to grow profits at 2.2% per annum over the next five years. In each case, earnings growth is accelerating and both stocks should remain strong barring any huge earnings miss. Both companies report their next set of quarterly numbers in October, and the report will drive the market into the final months of the year.
JP Morgan and Coca-Cola
Banking giant JP Morgan (JPM) and soft drink maker Coca-Cola (KO) are both outpacing the Dow Jones after nine months. JPM is up 23.2% while KO has risen 17.5%. Both stocks have shown strength in a volatile market, and both are trading just shy of their 52-week highs and both are testing their all-time highs. JPM faces some risk from falling interest rates and KO faces some pressure from an extended trade war with China. Both companies delivered positive earnings surprises in July and each will report their next set of numbers the third week of October. Wall Street expects modest earnings growth from each company moving forward with both companies expected to grow profits in the mid 5% annual rate range the next five years.
Cisco and Chevron
Cisco (CSCO) is the final stock in this week's group that outpaced the Dow during the first three quarters with the position up 17.3%. Chevron (CVX) is close to the Dow, but slightly underperforming with a 12.3% rise on the year. Networking leader Cisco remains ahead of the overall market but the stock is down sharply from its 52-week low over the summer despite topping estimates on the and bottom line in mid-August. Cisco is vulnerable to the ongoing trade war which could lead to a global recession and negatively impact the company's networking business. Chevron is trailing the market after falling sharply during the final week of September as crude prices started to retreat. CVX will continue to trade in sympathy to oil prices which are likely to remain volatile. Analysts remain upbeat on CVX, with an average price target of $137.64 versus its current price of $112.38.
Verizon and Merck
Telecom leader Verizon (VZ) and drug maker Merck (MRK) have both risen 11.7% on the year. Neither stock is keeping pace with the overall market, but each have posted respectable gains and are trading in the upper end of their 52-week ranges. Verizon is slow growth company with forecast earnings growth of just 2.9% over the next five years, but it also offers a very attractive 4.1% dividend yield. Utilities are famous for their strong capital programs, and with interest rates falling utilities such as Verizon will remain attractive as investors look for higher yields. Merck offers a smaller, yet attractive 2.6% yield, and the company is forecast to grow profits at a more respectable 9.6% per annum over the next five years. Merck posted mixed numbers at the end of July and is expected to post its next set of numbers at the end of October. Analysts expect to see earnings of $1.25, up from $1.19 during the same period last year. With the stock trading at just 15 times future earnings there is a good chance for a post earnings rally as long as the company does not report disappointing numbers for the quarter. Analysts have an average price target of $90.60 on the stock.
Exxon Mobil and Pfizer
Oil giant Exxon Mobil (XOM) remains in positive territory with a 7.3% gain while Pfizer (PFE) has struggled in 2019 with the position down 15.2% year to date. XOM shares got off to a strong start to the year before steadily losing ground since early April and are currently testing a major support level at $67. If the stock falls below that level the next level of support is around $63 at the stock's 52-week low. Oil prices are falling which is hurting the stock, but Exxon reported big top and bottom line beats in its latest quarterly report at the start of August. The better than expected numbers resulted in a short lived rally, with XOM stock quickly losing ground to where it was ahead of the last report. If XOM can bounce off its $67 support level the stock should move higher, but a breach below that level will lead to a sharper fall and could put the position into the red for the year. PFE is the only stock in the red, with shares down 15% and currently trading near its 52-week low. Pfizer reported mixed numbers in July with weaker than expected sales and the company will next report on at the end of October. If the company is able to post strong top and bottom line numbers the stock should rally. PFE is trading at 16 times earnings at $35.93 and analysts have an average price target of $42.00 on the stock.