When it comes to finding investment opportunities, one interesting strategy is to look at the year’s worst stocks in the Dow Jones. These are called the “Dogs of the Dow.”
The originator of this concept is Michael O’Higgins, who came up with it during the early 1990s (and yes, there is a website for this). It was part of a book he wrote called Beating the Dow. O’Higgins started his career in finance as a stockbroker and then started his own money management firm in 1978.
His investment approach involved looking at those Dow stocks with the highest yields. And yes, this often meant that the stock prices had lagged. Yet by focusing on the Dow, this contrarian approach had a better chance of success because the companies were higher quality.
But this theory may not necessarily work out too well if the markets are more focused on growth — which is certainly the case now. But hey, things can change quickly, and there could be a shift to value stocks.
Then what are the worst Dows stocks for this year? And might they be worth investing in? Let’s take a look at seven:
- Cisco (NASDAQ:CSCO)
- Merck (NYSE:MRK)
- J.P. Morgan Chase (NYSE:JPM)
- Intel (NASDAQ:INTC)
- Chevron (NYSE:CVX)
- Boeing (NYSE:BA)
- Walgreens Boots Alliance (NASDAQ:WBA)
Worst Stocks in the Dow: Cisco (CSCO)
The latest quarter for Cisco continued to show weakness, but the results were better than Wall Street expectations. The company reported a 9% decline in revenues to $11.9 billion. Yet the company had guided for a decline of 9% to 11%.
The earnings also exceeded expectations. They came to 76 cents per share, whereas the company had provided guidance of 69 cents to 71 cents a share.
The quarter saw strength in categories like collaboration, security and campus networking. There was also improvement in pricing and sales pipelines.
But when it comes to CSCO stock, there are some secular drivers that should bring the company back to growth. They include edge computing, Big Data, Cloud computing and 5G.
CSCO stock is also relatively cheap, with the forward price-to-earnings (P/E) ratio at 14.62 and the dividend yield at 3.21%. The company has also been continuing its aggressive share buybacks. They came to roughly $800 million in the quarter.
In the race for the Covid-19 vaccine, Merck has been caught flat-footed. But the company has been making up for lost time. To this end, it has acquired Themis Bioscience, which develops vaccine systems, as well as OncoImmune, which has a therapeutic for the virus. In the meantime, there has been another problem: The core pharma business has come under fire primarily because of the virus.
But this should be only temporary. Keep in mind that Merck has made great strides with various medical categories, such as oncology. At the heart of this is Keytruda. Sales are expected to reach a hefty $22.5 billon by 2025.
But the company has also made some key acquisitions in the space. One notable deal was for VelosBio, which has a promising pipeline of oncology drugs.
Regarding MRK stock, it is trading at a reasonable valuation of 12.27 times earnings, and the dividend yield is 3.3%. Note that the average price target for Wall Street analysts is $96, which assumes 22% potential upside from current levels.
J.P. Morgan Chase (JPM)
At the start of the year, the shares of J.P. Morgan Chase were showing nice momentum. At the time, JPM stock was trading at about $135.
But of course, the Covid-19 virus emerged and devastated the U.S. economy. JPM had to significantly increase loan-loss reserves and cut back on costs. Then there was the pressure on margins because of the rock-bottom interest rates.
Yet JPM stock had the advantage of a diverse platform to help manage through the crisis. For example, there was strong growth in IPOs (initial public offerings) and trading. As a result, the company has been able to maintain robust profitability and an attractive dividend payment, which is at 3%.
Another benefit for JPM stock has been the investments in fintech, which have helped to lower costs and improve the customer experience. Consider that JPM has launched a payments service that is similar to Square’s (NYSE:SQ).
Since the March lows, JPM stock has staged a strong rally. But the shares are still trading at a reasonable valuation of 13 times forward earnings.
It’s been a rough year for Intel. INTC stock has gone from $60 in January to less than $50 today.
Then again, the company has had problems with quality control and meeting deadlines. As a result, rivals like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) have been able to gain ground.
So what now? Investors should not panic. Intel has been working hard in restructuring its operations. There have also been some interesting acquisitions, such as in growth areas like next-generation chip systems and AI (artificial intelligence).
Besides, the company will benefit from long-term secular trends. Let’s face it, as data continues to become more valuable, there will be continued demand for chips.
INTC stock is also fairly cheap, with the forward price-to-earnings ratio at 11 and a dividend of 2.85%.
Among the major oil stocks, Chevron has had a fairly good relative performance. But CVX stock is still one of the worst stocks in the Dow. For the year so far, the shares are off 29% to $85, and the market capitalization is $164 billion.
During the past few years, Chevron has been engaged in a restructuring, which has included cost cutting, lower capital budgets and debt reduction. But with the impact of the Covid-19 pandemic, the company has accelerated these efforts. The result is that CVX was able to mitigate the net losses.
In the meantime, Chevron has been taking advantage of the lower valuations in the sector. The company recently acquired Nobel Energy for $5 billion, which will provide access to fields in the Permian Basin as well as various foreign markets.
The dividend on CVX is another attraction. The current yield is one of the highest for Dow stocks at 5.9%.
Until a couple years ago, Boeing was a model of growth and managerial discipline. But then came the horrible crashes of the 737 Max. And of course, the Covid-19 pandemic had a major impact on the operations.
Yet the company has been able to manage through all this. Even though BA stock is still one of the worst Dow stocks for this year, the shares have staged a remarkable turnaround. They have gone from $89 at their low in March to $219 today.
So what now? Actually, investors may want to be cautious. It seems like much of the good news is already baked in for BA stock. Besides, while tourism is likely to bounce back next year, more time is needed for business travel to get back on track.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance has the dubious distinction of being the worst stock in the Dow for this year. The shares are off more than 30%. But unfortunately, this is nothing new for the company. For the past five years, WBA stock has been a major laggard.
But the result is that the valuation is at low levels. The forward price-to-earnings ratio is only 8.36, and the dividend is an attractive 4.6%.
Yet investors may still want to be wary. Part of the reason is that the pharmacy industry is ripe for disruption. And yes, the main catalyst for this is Amazon (NASDAQ:AMZN), which has launched its own digital offering. Moreover, with the Covid-19 pandemic, consumers have become more accustomed to using ecommerce solutions for their prescription drugs.
True, WBA has been investing in its own technologies. But then again, it’s never good to play catch up against the mighty Amazon.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.