2019 was a great year for investors. The Dow Jones closed out the year with a gain of 22.0% despite lingering trade war fears and a lot of political uncertainty in Washington.
The Federal Reserve cut rates three times in 2019 to help spur economic growth in the face of the trade war, and a strong job market has kept consumer confidence and spending high.
There is still a lot of unknowns in the market. Tensions with Iran are flaring, there is always the possibility of trade negotiations between the U.S. and China falling apart, and there is no clear consensus on what direction the Federal Reserve will take in 2020. However, the major indexes remain near their record highs, and investors remain confident.
Last year was a good year for the 10 stocks in the Dogs of the Dow, but it was not good enough to outpace the 22% gain of the Dow Jones. The stocks in the Dogs rose an average of 19.6%, which is a great result, but just a little shy of the benchmark. Excluding dividends, the 10 stocks would have appreciated just 15.7%, which shows just how powerful dividends can be to a portfolio's growth.
Let's look at which stocks helped push the group higher, and which stocks weighed on the strategy's performance in 2019.
JP Morgan and Procter & Gamble
The top two performing stocks in 2019 were JP Morgan (JPM) and Procter & Gamble (PG). Including dividends, the two stocks appreciated 46.6% and 39.1% respectively. JPM was the top stock in the group last year with the company posting three straight quarters of better than expected profits. Overall economic conditions remain favorable, and the financial sector was one of the strongest in the year. The company most recently reported earnings in mid-October, with Q3 earnings of $2.68 per share, up from $2.34 during the same period last year. The bank has grown profits at an annual rate of 15.4% over the last five years and is expected to grow profits by 6.3% per annum in the next five years. JPM trades at just 12.8 times future earnings.
Consumer goods maker Procter & Gamble has risen steadily over the last 12 months, and the stock closed out 2019 just shy of its all-time high. The company posted positive earnings surprises each quarter last year, and earnings have risen 4% annually over the last five years. Looking ahead, analysts expect stronger growth of 8.4% per annum for the next five years. The company last reported earnings in late October of $1.37 for its fiscal first quarter, versus $1.12 during the same period the previous year. PG has a slightly high valuation, with shares trading at 23 times future earnings, which could prevent too much additional upside in the stock, but analysts do see modest upside potential in the stock. PG is currently trading at $122.77 with an average price target of $128.40.
IBM and Merck
International Business Machines (IBM) and Merck (MRK) were both in-line or better than the Dow Jones in 2019.IBM closed out 2019 with a gain of 23.6%. The company is trying to grow through acquisitions and hopes to become a major cloud player after its purchase of RedHat for $34 billion, with the deal officially closing last summer. IBM shares have been stuck in a sideways pattern over the last six months as traders wait to see how its recent acquisition helps to grow the company's business. IBM has struggled in recent years with profits falling 5% per annum over the last five years, but looking ahead analysts see a brighter future with earnings expected to climb 1.4% per annum moving forward for the next five years. The company showed year over year earnings growth in its second quarter, and it will need to show Wall Street more of that moving forward to keep bullish sentiment in the stock. IBM trades at $135.53 with an average price target of $154.25.
Merck was in-line with the Dow Jones in 2019 with a 22% rise. The company has posted better than expected quarterly numbers for 11 straight quarters and sales have topped estimates the last four quarters. Earnings are up 8.7% per annum over the last five years, and looking ahead analysts forecast profits to rise at an annual rate of 10% over the next five years. MRK is trading just shy of its all-time high and has a forward P/E of 15. The low valuation and strong growth estimates should keep momentum under the stock as we move into the new year. MRK trades at $88.64 with an average price target of $95.11.
Coca-Cola and Chevron
Coca-Cola (KO) and Chevron (CVX) both fell just short of the Dow Jones in 2019.Soft drink giant Coca-Cola rose 20.3% during the year and closed out 2019 just shy of its all-time high. Coke has faced a shift in consumer taste away from sugary soft drinks, but it has managed to post modest annual earnings growth of 1.9% and looking ahead analysts expect to see the company grow profits 4.7% per annum over the next five years. Coke has posted better than expected sales each of the last 13 quarters, with profits consistently in-line or slightly above analyst estimates. The company will not report earnings again until February 13 with analysts expecting a Q4 profit of $0.43 per share, in-line with the same period last year. Investors remain bullish on the stock and barring a negative quarterly report the stock should continue to build on its recent gains. KO has a forward P/E of 24, the stock is trading at $54.43, and analysts have an average price target of $57.57 on the stock.
Oil giant Chevron was not as strong as Coca-Cola in 2019, but it still had an impressive 15.1% gain. Oil can be a volatile commodity, and with tensions rising in the Middle East there is the potential for a rocky 2020. CVX stock closed the year in an upward trend, and shares are currently trading at 17 times earnings, which are forecast to rise at an annual rate of 9.6% over the next five years. The company will report its next set of quarterly numbers on January 31 with analysts expecting Q4 earnings of $1.57 per share, down from $1.95 during the same period last year. The expected earnings drop has already been priced into the stock and should not impact the stock as long as the company is able to hit the forecast. CVX trades at $118.25 with an average price target of $137.73.
Verizon and Cisco Systems
Verizon (VZ) and Cisco Systems (CSCO) both put up strong numbers in 2019, but each fell short of the Dow Jones' performance.Telecom giant Verizon closed out the year up 14.7%. Telecom is a very competitive, slow growth sector. Verizon has managed to grow earnings at a respectable 6.8% annual rate over the last five years, but growth is forecast to slow to 2.3% per annum for the next five years. The company has a good earnings track record, with better than expected earnings in the last eight quarters, but revenues have been less consistent, falling short of estimates three of the last four quarters. The misses have been small, and Wall Street has overlooked them and instead focused on the profit beats to keep shares moving in the right direction. The stock is trading at 15 times earnings at $59.90 and analysts have an average price target of $62.39.
Cisco Systems had a strong first half of 2019, but shares steadily fell during the second half to close the year up 13.9%. The stock has tried to rally but has failed to break through resistance at $49 on multiple occasions since last summer. The stock has an attractive valuation with a forward P/E of 14, and earnings are expected to climb 4.5% during the current year and 7% per annum over the next five years. Earnings have topped estimates the last nine quarters and revenues have surprised to the upside each of the last three quarters. Economic conditions are favorable for Cisco, and if the overall market trades higher in the first part of 2020 CSCO shares could trade higher in sympathy. If CSCO is able to break through resistance at $49 the stock has the potential to trade sharply higher ahead of its next quarterly report in February. CSCO trades at $47.50 with an average price target of $53.17.
Exxon Mobil and Pfizer
The worst-performing stocks in last year's group were Exxon Mobil (XOM) and Pfizer (PFE). XOM stock appreciated 7.4% during the year, while Pfizer was the group's sole stock that lost ground in 2019 with a loss of 6.9%. Both figures include four dividend distributions.XOM has been in a weak upward trend over the last three months, and with a forward P/E of 18.9 there is still upside potential as long as oil prices don’t trade sharply lower, and Exxon is able to keep pace with analyst estimates. The oil giant has posted better than expected top and bottom-line numbers in the last two quarters, and if the company is able to extend that streak when it reports its next set of numbers on January 31 the stock should manage to build on its recent gains. Tensions are flaring in the Middle East between the U.S. and Iran, and disturbances in the region could have a material impact on oil, which in turn would lead to volatility in XOM stock. XOM trades at $69.59 and analysts have an average price target of $79.42 on the stock.
Drugmaker Pfizer sold off sharply last summer, but the stock trended higher during the last quarter of the year to erase a big portion of its previous losses. The company has a good earnings track record but has posted weaker than expected sales in three of the last four quarters. The July sales miss drove the stock to a 52-week low, but shares started moving higher and a big positive revenue surprise helped drive shares higher in the final months of 2019. The company will next report on January 28, and the company needs to deliver another set of better than expected numbers for PFE to extend its recent gains into the first half of 2020. PFE trades at $39.08 with an average price target of $43.00.