The Daily Dow Approach, 06/12/97: The Daily Dow

The Daily Dow
Thursday, June 12, 1997
by Randy Befumo (TMF Templr)

WILLIAMSBURG, VA. (June 12, 1997) -- The Dow Dividend Approach focuses on a few very large companies. When you look at an index like the aptly named S&P 500 with all of 500 companies, the puny thirty stocks on the Dow seem paltry by comparison. However, if you look at the total size of the market capitalization of each company, you arrive at a different conclusion. Market capitalization is a measure of the current value of all of a company's stock. You determine market capitalization by multiplying the current price of the stock by the number of shares outstanding. The market capitalization gives a quick, shorthand guesstimate as to the current value of the entire company, although debt outstanding can inflate the real price that anyone purchasing the company might pay.

The S&P 500 is a market capitalization weighted index. This means that the value of the S&P 500 at any given time is derived from the sum of the market capitalizations of each of the 500 companies on the index. If you add up the market capitalization of each of the thirty Dow stocks, it makes up about 40% of the total capitalization of the entire S&P 500. Only thirty stocks, they represent almost half the capitalization of the second most quoted index in the world. While numerically 30 companies is much smaller than 500 companies, they make up for the difference with quantity of market capitalization, one of the factors that seems to be key in the spectacular performance of the Dow Dividend Approach.

The fact that Dow investors are buying stocks from among thirty of the world's largest corporations cannot be underestimated. Size of a company can be directly correlated with past performance of the company. Although a few companies might reach $1 billion or even $5 billion in market capitalization on smoke and mirrors, getting to $100 billion without having an actual business just does not happen. Thirty of the largest companies in the world, they have awesome resources to tap management talent or revitalize their core business with new acquisitions or development efforts. Finally, the shear size of these companies relative to the S&P 500 forces even four or five of these companies in an investor's portfolio to track the S&P 500 over longer periods of time. The sheer size (or quantity) can also be directly linked to quality, which we will discuss tomorrow.

DOW STOCKS NEWS

PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> enjoyed another up day despite Rep. Henry Waxman's decision to release damaging internal documents from the Liggett Group. Sanford Bernstein analyst Gary Black told investors to expect a tobacco litigation settlement by next Thursday, potentially quantifying the legal liability faced by these companies and leading to a reassessment of how these companies are valued. Shares traded up $1 7/8 to $44 1/2 today.

J.P. MORGAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> recovered some of its losses from yesterday after having a heart to heart with security analysts today. Despite the strong market, J.P. Morgan told analysts that trading revenues would be lower than they were last year, causing more than a few to reduce earnings estimates for the quarter by $0.20 to $0.25 per share. One analyst put his price target on J.P. Morgan at $107, slightly below the $109 1/4 level the company closed at today.

INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> continued to benefit from investor excitement about the paper and pulp industry. A Reuters newswire reported that pulp prices will be rising on July 1st, confirming the belief that a turnaround in the deeply cyclical industry will be happening sooner than expected. A spokesperson for Champion International pointed out that the last sustained upturn began with rising pulp prices.

GENERAL MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> lagged today, down $1/2 to $56 7/8, as sales numbers continued to drop. West European car sales fell 1.9% on top of news reported earlier this month that sales for all of May were pretty weak. Many see labor strikes as the culprit rather than end-user demand, as many popular models have not been in stock. Talks to avert another parts strike at GM's Delphi Energy and Engine Management division are moving "slowly," meaning that the bad news on the sales front may continue.

(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. ________________________________

1997 Foolish Four Model

Stock  Change   Last
--------------------
T    +   5/8   37.13
GM   -   5/8   56.88
CHV  +1        74.88
MMM  +3  7/8   98.38

               Day   Month    Year
        FOOL-4   +1.58%   3.22%   3.67%
        DJIA     +0.00%   3.34%  17.49%
        S&P 500  +0.00%   2.51%  17.39%
        NASDAQ   +0.00%   0.54%   9.05%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  120 3M            83.00     98.38    18.52%
   1/2/97  153 Chevron       65.00     74.88    15.19%
   1/2/97  179 Gen. Motor    55.75     56.88     2.02%
   1/2/97  479 AT&T          41.75     37.13   -11.08%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  120 3M          9960.00  11805.00  $1845.00
   1/2/97  153 Chevron     9945.00  11455.88  $1510.88
   1/2/97  179 Gen. Motor  9979.25  10180.63   $201.38
   1/2/97  479 AT&T       19998.25  17782.88 -$2215.38


                             CASH    $609.53
                            TOTAL  $51833.91