 |
In
This Edition... |
|
-
Dogs of the
Dow - Great Theory, Terrible Reality: Looking under the hood of a popular
stock-picking strategy reveals quite a mess.
-
Three Stocks
Worth a Look: PNM Resources (PNM), Hospitality Properties Trust (HPT),
and United States Cellular (USM) should be on your watchlist as buy candidates.
|
 |
Dogs
of the Dow - Great Theory, Terrible Reality |
|
|
With
the new year approaching fast, we know most of you are thinking about changes
you'd like to make to your portfolio now so you can hit the ground
running when 2010 gets here. Ideally, those changes will mean you beat
the market in the coming year.
While we strive
to help you do just that on an ongoing basis, today we're not going to
talk about a "what to do". Instead, we're going to talk about a "what not
to do". What you don't want to do is buy into the much-ballyhooed
'Dogs of the Dow' strategy.
 First
things first though, in case you're not familiar with the tactic.
Michael O'Higgins
introduced the theory in his 1991 book 'Beating the Dow'. His historical
research indicated that by buying the ten stocks with the highest dividend
yields among the thirty names in the Dow Jones Industrial Average, one
could expect to beat the Dow each year by an average of about 6.0%. Between
1973 and 1989, the Dow's ten highest dividend payers - which rotate
each year - saw an average return of 17.9% per year, where the Dow
Jones Industrial Average gained an average of 11.1% per year.
Makes sense,
right?
Cheap, quality stocks that are at least doing well enough to pay dividends.
Yeah, well, the actual results after O'Higgins' book came out have
been nowhere near as fruitful as the historical ones were.
Though the strategy
was unveiled in 1991, it didn't gain a large following (investors as well
as brokerage firms looking for marketable products) until the mid-90's.
Since 1996 - when the data started being gathered - the 'Dogs'
have only beat the Dow Jones Industrial Average three out of fourteen years,
if you count 2009's impending failure. That's just a hair over 20%.
And the 'average'
returns over the last fourteen years haven't shown much more hope. The
Dogs of the Dow strategy has returned 3.0% peer year, on average, while
the Dow itself has averaged annual returns of 6.8%.
 So
how in the world has the Dogs of the Dow theory managed to garner and keep
a following if it doesn't work? That's the power of hope..... even false
hope. Investors love the idea of a systematic, market-beating approach,
so much so that they'll ignore the facts unless they're shoved in their
faces (and even then, the facts are frequently ignored).
With that being
said, the premise of high-value, low-priced stocks isn't a bad one. The
Dogs of the Dow theory is flawed, however, in the way it's to be executed.
The 'purchases',
so to speak, of the Dow's ten dogs is to be made at the end of the calendar
year. That time of year is rife with changes, volatility, and other year-end
market speculating. In a vacuum, the environment would affect all thirty
Dow stocks equally, and therefore the timing shouldn't matter. The market
doesn't operate in a vacuum though. In other words, without any consideration
for timing the trades, the high yield stocks at the end of the year may
not actually be the highest dividend-yielding stocks during the rest of
the year.
Another potential
pitfall is the assumption itself - that dividends will continue being paid
at their present rate of payout. If a stock is yielding a high dividend
though, let's face it..... it's likely to be the result of a falling stock.
And why do stocks lose value? Because the company - and therefore
the ability to pay dividends - is in jeopardy.
We could go
on, but the data and those two flaws make the point well enough. We encourage
the use of rules-based investing. The results just can't justify the 'Dogs
of the Dow' brand of it.
|
|
Three
Stocks Worth a Look |
|
|
OK, so we now
know the Dogs of the Dow strategy stinks, but that leaves several thousand
other stocks that could all be viable and profitable investments. Here
are three of the best ones we've identified this week. You can add them
to November 4th's 'Six
Stocks Worth a Look'.
PNM Resources,
Inc. (NYSE:PNM)
 A
utility company may not be the most exciting of stock picks, but what PNM
Resources lack in pizzazz it makes up for with results. Though the company
fell short of expectations and took a 12 cent per share loss four quarters
ago, it's topped estimates every quarter since then.... by a lot
(not to mention being profitable again in all of them). The valuation is
just mediocre, with a P/E ratio in the teens; so too is the forward-looking
one. Margins are just mediocre too, even by utility standards.
So why the
bullishness? Because PNM Resources is at least creating those results
reliably, which means its dividend is protected. That's not the only reason
to like it though.
The shape of
the chart - the long-term bowl-shaped reversal to be specific -
hints PNM Resources is making a major turn for the better. Higher highs
and higher lows are just the beginning; the 200 day moving average line
is pointed higher now as well, and it acted as a floor (and rebound
point) when PNM fell back into it last month. Best of all, real volume
is driving the new rally. That's the most important ingredient of all for
this stock's rally, which still has tons of room to recover.
Does the
utility theme ring a bell? It should. We posted a bullish outlook on
the sector in our
December 8th analysis. This pick is the result of putting that outlook
into action.
Hospitality
Properties Trust (NYSE:HPT)
 This
is a tough one to handle. On a technical basis, the chart's overbought
by almost very oversold/overbought standard. Yet, we can see Hospitality
Properties Trust is no stranger to making more gains despite being
overbought. Just look back to the third quarter for proof.... HPT was stochastically
overbought the whole time.
Making the matter
even more difficult is that - despite the recent gains from the stock
-
shares are still technically a bargain. The trailing price multiple of
11.5 is fair, but pales in comparison to the future-looking P/E of 7.1.
And yes, Hospitality Properties Trust can do it - the company's
basically met analyst expectations for four straight quarters. Looks like
the analysts have this one figured right. Therefore, HPT is a solid value.
Hospitality
Properties Trust is a mid-cap REIT, specializing in hotels. And, it's a
pretty good one, staving off serious problems during the recession while
its competitors suffered gravely. That strength is already shining through,
as the company is firmly growing net income again.
United States
Cellular Corporation (NYSE:USM)
 Yes,
we mentioned this stock last week, but the setup has taken on the shape
we wanted to see in the meantime. So, here's a better look...
United States
Cellular is a small cap (the market cap is $3.5 billion) in the wireless
communication space. As we said then, the numbers on a trailing twelve
month basis don't look all that great, but a closer inspection reveals
the massive loss of $2.29 per share taken four quarters ago is the only
reason the fundamental snapshot looks ugly. In fact, the company beat estimates
in two of its last three quarters. The forward-looking P/E of 19.5 is very
plausible, based on the recent revenue & income trend. The fact that
few others realize all this is the core of the opportunity.
Simultaneously
(and this is why we're looking at it again), USM has further crossed
a couple of major technical hurdles. The first one is breaking out -
bullishly - of the wedge (framed in blue) that's been confining the
stock since early this year. There's no indecision on that front any longer.
The second is the recent move back above the 200 day moving average line,
which is now pointed upward. We didn't look at the 200 day line at all
last week.
In sum, these
are signs that the 'bigger trend' momentum has changed and firmed up for
the better.
It's no coincidence
we're interested in a telecom stock either. We
went bullish on that sector back on December 8th too.
|
Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
