<THE FOOLISH FOUR>

What Makes a Dog?
by Ann Coleman
(TMF AnnC)

Reston, VA. (September 9, 1998) -- What makes a stock a "dog?"

If you hear an investor declare, "The minute I bought it, it started to bark!" you can bet the speaker isn't bragging about his or her stock picking skills.

As a devoted friend of man's best friend, I've never understood why something no one wants should be called a dog, but in investing (we won't go into other areas) a dog is a stock no one loves.

The phrase "Dogs of the Dow" has been used for years to describe the strategy of buying the highest yielding Dow stocks. When a company is paying a healthy dividend but the stock's price stays low, the yield (the dividend divided by the price, expressed as a percentage) will be high. In effect, a number of investors are saying, "You can't PAY me to own that stock!"

The Foolish Four is basically just a refinement of the Dogs of the Dow strategy. We pick our dogs more carefully with the benefit of more sophisticated techniques, but they are still dogs.

Eastman Kodak is the star pup of the Foolish Four these days. No longer flea-bitten and homeless, Kodak is single-handedly keeping our Foolish Four model portfolio afloat.

But what did it look like when the Foolish Four took it in?

All last year the news for Kodak seemed to go from bad to worse. Kodak started the year off nicely peaking in the low $90s in February -- then, as the rest of the Dow bounded joyously to a fourth year of outperformance, Kodak slid down and down and down. FujiFilm was threatening Kodak's sales all over the US, and Kodak lost an unfair trade practices claim against Japan. Digital cameras were making film obsolete, and Kodak "obviously" couldn't build a decent digital camera. Jobs were being cut right and left, and earnings weren't meeting Wall Street's expectations. By December Kodak had lost a third of its value, and the general tone of most news stories was pity... pity and awe that a once-proud giant had fallen so far.

Nobody wanted Kodak. And so it took its place in the Foolish Four.

Two weeks later, the company announced a fourth quarter loss of $744 million -- at that point the stock was so reviled it barely dropped. Not a sign of faith, exactly, just a sign that the bad news was expected.

By April when the Dow was first flirting with 9000, Kodak was still sitting in the chimney corner in the low $60s, close to where it had been when joined our model portfolio on December 31.

Then the news got a bit brighter. Kodak announced a partnership with AOL to deliver digitalized photos to customers through email. Their digital cameras were winning awards, and most importantly, the company began making money. On July 15 the company announced earnings of $1.51 per share, up 36% over the comparable quarter last year. The stock jumped from $73 3/4 to $83 1/16 in one glorious day.

Kodak is a wonderful example of how the Foolish Four works. It's almost too good, because the turnaround happened almost too quickly. You can't expect that kind of speed for most comebacks -- and some stocks do skid out on the turn -- but next time someone asks you why you bought that dog, remember Kodak. Nice doggie!

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/09/98 Close

Stock Change Last -------------------- UK -1 15/16 40.38 IP - 1/16 42.25 MO + 1/4 43.19 EK + 3/8 81.63

Day Month Year FOOL-4 -0.81% 5.52% 6.90% DJIA -1.94% 4.32% -0.55% S&P 500 -1.69% 5.08% 3.69% NASDAQ -2.19% 8.36% 3.45% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 81.63 34.78% 12/31/97 289 Int'l Pape 43.13 42.25 -2.03% 12/31/97 276 Philip Mor 45.25 43.19 -4.56% 12/31/97 291 Union Carb 42.94 40.38 -5.97% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 16814.75 $4338.88 12/31/97 289 Int'l Pape 12463.13 12210.25 -$252.88 12/31/97 276 Philip Mor 12489.00 11919.75 -$569.25 12/31/97 291 Union Carb 12494.81 11749.13 -$745.69 CASH $754.73 TOTAL $53448.61