The Daily Dow
Wednesday, August 6, 1997
by Robert Sheard
LEXINGTON, KY. (August 6, 1997) -- An essential tenet of the Dow Approach is that it chooses relatively out-of-favor stocks from among the thirty industrials. It does so, of course, with a simple dividend yield comparison, identifying the ten with the highest yields (since the yield will rise when a stock's price slumps as long as the dividend remains constant).
What the approach doesn't try to measure, however, is whether a stock on our out-of-favor list is slumping further or is already beginning its recovery. The theory isn't fine-tuned enough to measure this and our assumption is that as long as one gets most of any gain a recovering Dow stock makes, the overall results for one's portfolio will be Foolishly awesome, and with very little work. History confirms this assumption. (Just ask your mutual fund manager if he'd take a 26-year track record like the Dow approach's.)
So when a stock like AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> drags down the results of the portfolio, don't take that as a sign that the approach is somehow broken. It may well simply be that we updated our portfolio at a time when AT&T was still headed lower, but had already appeared in the rankings. That may mean we suffer some early in the portfolio cycle, or even into the following cycle if the stock stagnates for a while, and then get a recovery later on.
While I'm not a fortune teller, and not even a traditional financial analyst (I'm more of a quant than anything, looking at the numbers to tell me the stories), I am nevertheless encouraged by the last quarter for AT&T. As you can see on this chart, AT&T looks to have bottomed out in late April at a low of $30 7/8. Since then, however, the stock has begun showing signs of life, regaining more than 26% from its low. While that's only a couple points ahead of the market index's gain during the same period, at least AT&T is not lagging by twenty or thirty percentage points as it had been doing.
No promises. No predictions. (Too Wise for us.) But keep the stock's performance in perspective. It may take another year or so for AT&T to climb back out of the high-yield rankings, and it may or may not ever be a star performer, but it's certainly looking as if it's following the typical Dow Dog pattern, falling on hard times, showing up in the rankings, and then a gradual recovery. Let's hope it drags itself out of the red inky muck shortly and boosts the
(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 +1 39.06 GM + 11/16 63.69 CHV + 5/16 80.19 MMM + 7/16 96.00
Day Month Year
FOOL-4 +1.30% 3.23% 9.33%
DJIA +0.88% 0.45% 28.09%
S&P 500 +0.83% 0.63% 29.64%
NASDAQ +0.55% 2.30% 26.29%
Rec'd # Security In At Now Change
1/2/97 153 Chevron 65.00 80.19 23.37%
1/2/97 120 3M 83.00 96.00 15.66%
1/2/97 179 Gen. Motor 55.75 63.69 14.24%
1/2/97 479 AT&T 41.75 39.06 -6.44%
Rec'd # Security In At Value Change
1/2/97 153 Chevron 9945.00 12268.69 $2323.69
1/2/97 120 3M 9960.00 11520.00 $1560.00
1/2/97 179 Gen. Motor 9979.25 11400.06 $1420.81
1/2/97 479 AT&T 19998.25 18710.94 -$1287.31
CASH $767.60
TOTAL $54667.29