Market Overview

Beware of the Dog

For those in the dark, there are traders who love to invest in the stocks known as the “Dogs of the Dow”. These are the stocks from the 30 listed in the Dow Jones which have performed particularly badly over the past year. If you would like to be alerted to Dow Jones updates as they come out in real-time, signup for a free trial of Benzinga Pro's premium news service.

According to DogsoftheDow.com, “Investing in the Dogs of the Dow is relatively simple. After the stock market closes on the last day of the year, of the 30 stocks that make up the Dow Jones Industrial Average, select the ten stocks which have the highest dividend yield. Then simply get in touch with your broker and invest an equal dollar amount in each of these ten high yield stocks. Then hold these ten "Dogs of the Dow" for one year. Repeat these steps each and every year. That's it!”

It is an interesting approach, though it is worth noting that DOTD recommended taking small, puppy-ish steps to begin with. “Some of you may be interested in trying to outperform even the traditional Dogs of the Dow. Well, we have a way that historically has done just that. On the last day of any given year, select the ten highest yielding stocks as you normally would. Of these ten Dogs simply select the five Dogs with the lowest stock price and you will have what we call the Small Dogs of the Dow (Sometimes referred to as the Puppies of the Dow or the Flying Five). Then get in touch with your broker and invest an equal dollar amount in each of these 5 high yielding, low priced stocks. Then hold these five "Small Dogs of the Dow" for one year. Investing in the Puppies of the Dow would have resulted in a 20.9% average annual return since 1973!”

So if one were to play the dogs at the end of 2011, which would be the companies to play with?

Well, at the time of writing, Bank of America (NYSE: BAC) looks like the poorest performer with a year-to-date change of -61.51 percent. Obviously, these are not the easiest economic times to be running a bank. Still, when Brian Moynihan tried to implement a $5 monthly debit card fee in only his second year as CEO, the writing was on the wall. 2011 was a horrible year for BAC. However, when the economy picks up, there is every chance the BAC will too.

Alcoa (NYSE: AA) has a year-to-date change of -43.01 percent, and it has fallen short on income all year. It's October revenue topped analyst expectations though, making it an ideal “dog”.

Computer giant Hewlett Packard (NYSE: HP) has a year-to-date change of -38.13 percent, and that must have something to do with the fact that two of the three products unveiled at the Think Beyond event in summer 2010 saw pretty disastrous sales. This is HP though, a company that has stuck around for a reason. Never underestimate a technology group with a history.

Like BAC, JP Morgan Chase (NYSE: JPM) is suffering because of the economy, and has a year-to-date change of -24.63 percent. Some would say that the figure could have been a lot worse though, and for that reason JPM is a good dog.

DuPont (NYSE: DD) has a year-to-date change of -9.74 percent, but some analysts insist that it had a great year. Motley Fool said that, “ter maintaining strength for months, DuPont's shares plunged to a low of $38.49 in the first week of October when Europe and Greece crisis fears hit the markets hard. The shares then bounced back beautifully, recovering almost 27% in a month's time. Now, when the year is coming to an end, DuPont's shares have again lost some value after the company lowered its full-year earnings guidance.”


ACTION ITEMS:

Bullish:
Traders who believe that the Dogs of the Dow will pay off might want to consider the following trades:
  • All of the above, so Bank of America, which could well pick up as soon as the economy does. Not sure how long we should hold our collective breathe on that one,
  • DuPont, which had a better year then the figures suggest, and
  • Hewlett Packard, which is one impressive product away from a resurgence.
Bearish:
Traders who believe that a dog is still a dog, not matter how you dress it may consider alternative positions:
  • Just look elsewhere. Playing the dogs is not for everyone
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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