The Daily Dow
Wednesday, June 11, 1997
by Randy Befumo (TMF Templr)
WILLIAMSBURG, VA. (June 11, 1997) -- How efficient or inefficient is the market? Whether or not you realize it, this is the question that anyone who follows a mechanical approach to buying and selling stocks has to answer. Whether you as an investor use the Dow Dividend Approach or one of the more experimental variations that live in the Workshop, this is a very important question to explore before you deploy your hard-won savings into the world's greatest wealth creation engine, the stock market. For the next few days while regular Fool writer Robert Sheard is off gallivanting about the countryside, I wanted to take the time to explore this issue both as it relates to the Dow Dividend Approach and to the Foolish Workshop.
The 36-plus year record of the Dow Dividend Approach is statistically significant. No matter how you slice the high-yielding Dow stocks, they tend to outperform the Dow as a whole by two or three "standard deviations," a statistical term that reflects the average difference between returns in a given set of data. Although when you compare the performances among the Dow Dividend Approach variations, the statistical significance of the differences is minimal, just by staying tightly within the ten high-yielding stocks one appears to systematically receive higher returns with lower volatility than the thirty Dow stocks as a whole, a remarkable performance.
How can this be? How does this work? Over the next few days I will try to build a comprehensive hypothesis that explains this outperformance. The four key variables appear to be quantity, quality, time frame, and total return. Although independently very few of these variables are winners by themselves, in tandem the disciplined investment approach that results rewards shareholders with high total returns where the capital appreciation component is always taxed at the most favorable rate. Compared to the high turnover inherent in stock mutual funds that are heavily biased towards the short-term, on this tax aspect alone one might want to consider the Dow Approach as a superior investment vehicle. I will try to cover the actual news among high-profile Dow stocks at the end of this report, just so investors using the approach can keep up with what is going on in the stocks that they own.
DOW DIVIDEND STOCK NEWS
EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> took a slider today after investors got concerned about a looming price war with Japanese-based Fuji. Off $4 1/4 to $79 5/8, this is just the latest in the long saga of Japanese film giant Fuji going head to head with Eastman Kodak at home and abroad. Fuji has apparently been pricing film at a level that puts pressure on generic film makers, who price their wares 40% to 50% below the average Eastman Kodak product. In addition, Salomon Brothers analyst Jonathan Rosenzweig reported on evidence that suggests that Kodak's consumer imaging business will get worse before it gets better, dragging down the profits of the company as a whole.
The most avoided Dow Dividend stock of them all, PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, rose $3/8 to $43 1/8 on news that talks to settle outstanding tobacco liability had continued to make progress. Although the White House still maintains that there is a lot of work to be done, a settlement that would allow these companies to sell a legal product to adults with the same kind of restrictions as alcohol would be beneficial to all.
J.P. MORGAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> slipped $1 3/4 to $109 3/4 in spite of paying out its $0.88 quarterly dividend after an analyst warned that the company could miss its second quarter earnings estimates. Although Reuter's did not say who the analyst was, they did reveal that this individual had warned that the company could be off by as much as $0.20 to $0.25 per share. The current consensus estimate is $1.95 per share.
INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> may not have finished up much, rising
$5/8 to $50 3/8, but did strike a new 52-week high. With many investors guessing
that the paper companies have reached the bottom of the cycle and are due
for an uptick, Dow investors who bought the shares near the lows have a nice
profit. Buying cyclical stocks at the low and holding is why Beating the
Dow author Michael O'Higgins believes the Dow approach works, and why he
is now bearish on it with the Dow getting rid of more and more cyclical companies
in favor of growth names like JOHNSON & JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>.
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T + 1/4 36.50 GM --- 57.50 CHV + 1/2 73.88 MMM - 1/8 94.50
Day Month Year
FOOL-4 +0.36% 1.62% 2.06%
DJIA +0.48% 3.34% 17.49%
S&P 500 +0.50% 2.51% 17.39%
NASDAQ +0.44% 0.54% 9.05%
Rec'd # Security In At Now Change
1/2/97 120 3M 83.00 94.50 13.86%
1/2/97 153 Chevron 65.00 73.88 13.65%
1/2/97 179 Gen. Motor 55.75 57.50 3.14%
1/2/97 479 AT&T 41.75 36.50 -12.57%
Rec'd # Security In At Value Change
1/2/97 120 3M 9960.00 11340.00 $1380.00
1/2/97 153 Chevron 9945.00 11302.88 $1357.88
1/2/97 179 Gen. Motor 9979.25 10292.50 $313.25
1/2/97 479 AT&T 19998.25 17483.50 -$2514.75
CASH $609.53
TOTAL $51028.41