I'm not one to follow market trends like the January effect, election year cycles, or even how the market will perform based on what NFL conference wins the Superbowl, regardless of how many decades of data such theories are anchored on. That said, the one trend that is of interest to me is the Dogs of the Dow theory.
IN PICTURES: Eight Ways To Survive A Market Downturn
The Dogs of the Dow theory is simple to explain. At the end of each market year, the top 10 highest yielding stocks in the Dow Jones Industrial Average are selected in a mock portfolio and the returns are analyzed each subsequent year. As you might guess, periods of outperformance have been matched with periods of underperformance over a period of years. So just like any other self-described market pattern, over the long run there is no secret sauce or magic formula that promises significant abnormal returns.
An Interesting Year
What is interesting about this theory for 2010 is that the list just so happens to be made up of some very high quality stocks with incredibly attractive yields. For 2009, the theory did not pay off. Names like Bank of America (NYSE:BAC), which began 2009 at $14 a share and a yield of 9%, ended the year relatively flat and eliminated its dividend. The strongest result was JP Morgan (NYSE:JPM), which was up nearly 30% while most other names in the group of 10 - AT&T (NYSE:T), General Electric (NYSE:GE), Verizon (NYSE:VZ) - were flat.
For 2010, the list includes names like Kraft (NYSE:KFT) and Pfizer (NYSE:PFE), which incidentally, were also "dogs" heading in 2009. Indeed, while you may have felt dumb if you owned the flat-lining Kraft at the beginning of 2009, the truly dumb part is basing an investment return on 12 months of results. Kraft is at the end of a three-year turnaround plan, which is moving along nicely. In addition, the company continues its pursuit of Cadbury (NYSE:CBY), which will provide yet another growth opportunity if the acquisition goes through. As for Pfizer, it's a cash cow machine that will likely benefit from the additional insureds that are sure to come as a result of healthcare reform. Pfizer's loss of any revenue from off-patent drugs should be aided by the growth in the generic drug business. (For more, see Don't Dump On The Dogs.)
Bye Bye 2009
While no one can predict the future, it's doubtful that 2010 will see the same upward move in stocks as 2009. After all, prices are no longer undervalued like they were a year ago. However, although these big-name stocks may look boring now, they remain some of most attractive investments for the general investing public. (For more, check out Barking Up The Dogs Of The Dow Tree.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!