<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 13, 1998) -- "With all the litigation facing Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, shouldn't one throw it out of the high-yield rankings until the situation is cleared up?"

That question, or a similar one applied to other companies, is a very popular one from readers new to the Dow Approaches. And the answer takes some getting used to.

Let's step back a moment. The basic premise of the "Dogs of the Dow" approach is that one buys the stocks no one else wants and then holds them patiently for the expected recovery. The reason no one else wants these stocks -- the reason they're Dogs -- might change from stock to stock and year to year, but it's always something that makes the typical investor say "ewww, yuck! No way am I putting my savings into that piece of junk."

The bad news for these stocks, whatever that news may be, is typically already factored into the current stock price, which is why it's often a bargain when it looks so awful. Think back to two classic Dog examples. After the Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> Valdez collision with Alaska or after Union Carbide's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> deadly mishap in Bhopal, India, would you have wanted to buy those two stocks? Naturally, most people didn't --and the stocks got hammered, bringing them right into bargain range for Dow Approach investors. Within a short period of time, both stocks recovered. In fact, they both went to new highs shortly afterwards. But believe me, the story looked awful.

The Dow Approach works so well because it ignores the story itself. That story, whatever gloom and doom prospect hurt the stock in the first place, is already depressing the stock price. So in that regard, the uglier the story (to an extent), the better it is for Dog walkers. As long as the company is financially strong enough to leave the dividend intact, you have a clear sign that the turnaround is worth waiting for. It's only when a stock slashes its dividend that you should really worry about how many feet there are between you and the exits.

Now, having said all that, Philip Morris still may not be an ideal investment at this time based on the ranking system's red flag when a stock is both the highest yielder of all thirty Dow stocks and the lowest-priced stock of the High-Yield 10. Since 1971, no stock in that dual #1 position has helped the Foolish Four, so we skip stocks sporting that distinction (as Philip Morris does today).

But in general, just because a stock's story looks bleak is no reason to abandon the rankings. That's exactly why the rankings work. Just recall AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> last year. At this time in 1997, AT&T was being pronounced dead and bears were taking measurements for the burial clothing. Yet by year's end, the turnaround was under way and the stock ended with a 53% gain. Patience and trust in the contrarian approach paid off again.

Tonight at 7:00, Fools, I'll be the guest "speaker" at a Barnes & Noble author's chat, taking questions about The Unemotional Investor. If you'd like to stop by, the address is www.barnesandnoble.com. Hope to see you there.

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   -  15/16  53.69 
 IP   ---       54.25 
 MO   -   7/8   37.00 
 EK   +   9/16  71.63 
 
 
  
                    Day   Month    Year 
         FOOL-4   -0.70%   3.44%  13.37% 
         DJIA     +0.55%   1.64%  16.48% 
         S&P 500  +0.27%   0.64%  15.30% 
         NASDAQ   +0.32%  -0.12%  18.84% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     54.25    25.80% 
  12/31/97  291 Union Carb    42.94     53.69    25.04% 
  12/31/97  206 Eastman Ko    60.56     71.63    18.27% 
  12/31/97  276 Philip Mor    45.25     37.00   -18.23% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15678.25  $3215.13 
  12/31/97  291 Union Carb 12494.81  15623.06  $3128.25 
  12/31/97  206 Eastman Ko 12475.88  14754.75  $2278.88 
  12/31/97  276 Philip Mor 12489.00  10212.00 -$2277.00 
  
  
                              CASH    $415.96 
                             TOTAL  $56684.02