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The Dogs of the Dow Make It Three for Three
The Dogs Remain Out In Front
The bulls remained in charge for the first quarter of 2013, with several of the key equity averages sprinting to their highest levels ever, largely thanks to positive news on the economic front and a commitment of support from the Federal Reserve.
The Dow 30 Industrials, in just the first three months made a larger advance than they did for all of 2012. The Dogs (referring to the 10-highest yielding Dow 30 Industrials at the start of the year) meanwhile, more than doubled their gains from all of last year, and outpaced the Dow as a whole by a wide margin.
Indeed, an equally weighted position in each of the Dogs would have shown a year-to-date advance of 16.7% through March. Meanwhile, a similar stake in all 30 Dow stocks would have been up 11.9%, while holding the “non-dogs” exclusively would have produced a gain of “only” 9.5%.
Packing Them In
The big story remains the recovery in Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report) stock. As readers may recall, the issue fell 44.7% last year, as the computer maker racked up large losses due to writedowns of its Autonomy software business and workforce reduction program charges. Since then, the shares jumped 67.3% through the first three months of 2013.
While concerns remain about the company’s year-ahead outlook, traders appeared to be relieved that January-period results weren’t as bad as some had expected. Although share earnings were down 14% year over year, the $0.63 bottom line figure was a huge improvement over the prior two periods, during which H-P racked up a combined loss of $7.98 per share. In what management describes as a “fix and rebuild year” the company is launching a number of new products and services, and savings from its cost-reduction program are expected to accelerate as the year progresses. On the other side of the coin, H-P has four large services contracts, including one with General Motors (GM), that are set to expire soon. Altogether, though, fiscal 2013 (which ends October 31) should find the company solidly back in the black.
In Good Company
HPQ accounts for far and away the largest portion of the Dogs’ gains this year. But, even if we were to exclude the stock’s advance as a bit of an outlier, we would find that the rest of the mutts were up a very solid 11.1% over the period.
Among the other notable performers we have Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), a diversified healthcare company whose stock price rose 16.3% for the first quarter. The company closed out 2012 on a good note and we expect the top and bottom lines to post nice advances this year, fueled by good performance from the Pharmaceutical group and last year’s addition of Synthes to the Medical Devices & Diagnostics division.
Meanwhile, pharmaceutical giant Pfizer (PFE - Free Pfizer Stock Report) also turned in a strong showing for the period, with its shares rising 15.1%. Although generic competition for its blockbuster Lipitor drug continued to weigh on the top line last year (related sales were down 7%, to $15.1 billion), the decline was a bit less than some had feared. Effective cost management and strong sales growth in the Emerging Markets and Consumer Healthcare segments lent support to earnings. For 2013, investors have their hopes set on the company’s most promising new products; Xelijanz (for rheumatoid arthritis) which was approved in November and Eliquis (for stroke prevention) which got the FDA nod in December. The later, in particular, stands a good chance of achieving blockbuster status, with some estimates calling for potential peak sales in excess of $5 billion a year.
Rounding out the list of Dogs stocks with double-digit increases in the first quarter were Verizon (VZ - Free Verizon Stock Report, up 13.6%), McDonald’s (MCD - Free McDonald's Stock Report, 13.0%), and General Electric (GE - Free General Electric Stock Report, 10.1%).
So Far, So Good
The Dogs of the Dow strategy has worked out quite nicely so far this year, beating the returns of the 30 Dow Industrials as a whole each month of the first quarter. Of course, we can’t expect all of 2013 to unfold with such huge gains for equities. Indeed, with many indexes at new all-time highs, it raises the likelihood of some profit taking, if not a significant correction. In the case of the latter, the 16.7% advance for the Dogs in the March quarter, along with the fact that the portfolio started the year with a yield advantage of more than 1% over that of the Dow 30 Industrials, should serve to buffer the impact of a downturn.
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.