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Is
This 'Dog of the Dow' Ready To Lead The Pack? |
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 Welcome
to the new year! We don't want to waste a minute of it, so we've already
got a new trading idea for you. And just for the record, the same strategy
behind today's pick found us a 34% winner last year...which is a
heck of a lot better than the overall market did.
The
Dow's 'Dog' methodology is simple enough - of the thirty companies making
up the Dow Jones Industrials, find the ten stocks that have the highest
dividend yield at a particular point in time. According to the strategy,
those
ten stocks are likely to outperform the Dow during the coming year.
It's
actually not a bad premise, though we've observed a couple of regular
problems with the theory...(1) it doesn't always work, and (2) holding
ten stocks can tie up a significant chunk of your portfolio.
 Take
last year as an example of problem #1. For 2007, the Dow's dogs actually
fell by an average of 1.4%, versus the Dow's modest 6.8% gain. Problem
#2? Well, it speaks for itself. Citigroup (NYSE:
C) and General Motors (NYSE:
GM) were the key culprits behind the theory's failure in 2007,
but blind followers of the dog strategy still suffered.
All
the same, we like the idea of undervalued stocks, so we created a 'work-around'
to both problems mentioned above - we don't necessarily want to own
all ten dogs. Last year we only found two stocks out of the ten we
really liked, and ended up only owning one of them. In the January
3rd, 2007 edition of the newsletter we used the 'Dogs of the Dow' strategy
to narrow the list down to Merck (NYSE:
MRK). Our solution worked pretty well too, as we scored a 34% win
with the trade.
That
being said, we did a little more due diligence on 2008's Dogs of the Dow.
Our additional criteria included technical, fundamental, as well as marketplace
considerations. From the effort, we've again narrowed our candidate list
down to one of those stocks - Verizon Communications (NYSE:
VZ).
 There
were a few really compelling choices among 2008's dogs. J.P. Morgan
(NYSE: JPM)
and Citigroup (NYSE:
C) - a couple of major financial stocks - got a serious
look from us. Why? The bleeding from the financial sector has to end sometime.
Plus (and
as we said in our 'Top Ten Predictions for 2008' edition), with Warren
Buffet and Martin Whitman starting to migrate back into the sector with
real dollars, this segment's recovery may be closer than a lot of people
expect....not to mention bigger. But, since we still don't know
that J.P. Morgan and Citigroup are quite done with their punishment, we'll
pass on those two names for now.
Altria
(NYSE: MO)
also
got a close look from us. Good fundamentals, good technicals. I consider
it one of those names you can buy and hold for as long as you want to.
You'll probably never hit a grand-slam with it, but you'll have reliability
in lieu.
In
the end though, MO's near-term outlook didn't look quite as compelling.
The chart's a little more frothy (a couple years worth of all-time highs)
than I normally like from what is likely to be a multi-month investment.
To that end...
One
of the reasons I liked Verizon was that it still hasn't challenged
1999's highs. At the same time though, the chart's got some momentum...which
is backed up by the company's underlying performance. It's nothing that'll
knock your socks off, but I think the market - and analysts - are
underestimating Verizon's potential.
 Better
still, take a look at the nearby chart of Verizon. The last few days have
been rough. Heck, the last few weeks have been less than stellar.
Since late 2006, however, investors who've bought VZ on a dip have been
nicely rewarded. The 200 day moving average line (one of my favorite
long-term indicators) is also coming back into view. If an encounter
now is anything like late-November's encounter with the 200 day average,
we could be approaching another bullish swing soon.
From
a macro perspective, we like how consumer's telecom spending trends are
rising within the telecom arena - particularly for wireless services.
At the same time, data transmission over the Internet is rapidly approaching
its capacity. The solution to the growing problem is going to (eventually)
necessitate higher capacity...the kind only fiber-optics can provide at
this point.
What's
that got to do with Verizon? They've got both bases covered. Their
share of the wireless market is huge, and they seem to be ahead of the
fiber-optic cable curve - since they've been laying lots of it when nobody
else seemed to want to (something
we mentioned over a year and a half ago).
So
what's Verizon's potential from an investor's point of view? Before
we even go down that road, let me reiterate that it took about eleven months
for last year's 'dog' idea to reach its targeted value. Of course, I think
a 34% gain isn't a bad eleven-month move for a stock like Merck. I don't
think any Dow stock is going to be an overnight sensation, so no matter
what, patience is a prerequisite.
OK,
with that out of the way, I think VZ could feasibly reach $57.22 sometime
in 2008. As for a stop, I'd suggest $40.75. That was November's low, but
we also used the $40.75 area as support in the fall of last year.
Anyway,
there ya' go - a trading idea to get the year going.
I just
wish we could have inspired the rest of the market and other investors
to do something besides sell today. However, I'll also caution you against
worrying about starting the year off on the wrong foot. We've started terrible
years on the 'right' (bullish) foot, and started great years
on a terrible foot. If anything, I see today's move as nothing more
than an extension of the last few days of 2007...and some delayed
tax selling. Let's not make any assumptions about the market at this point.
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Got comments, questions or suggestions?
Send 'em on over: Email
the Editor
If you wish to send a written request
or inquiry, please send it to our physical address:
TGR Group, LLC
4653 Carmel Mtn Rd Suite 308 #402
San Diego, CA 92130 |
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