<THE FOOLISH FOUR>

Who Owns These Dogs?
by Chris Rugaber
([email protected])

Alexandria, VA (November 5, 1998) -- Last week we looked at the question of whether there were "too many" investors following various High Yield Dow investing approaches (a.k.a. the Dogs of the Dow and Beating the Dow), and whether that would reduce the strategy's effectiveness. If too many people bought our Foolish Four stocks, for example, wouldn't that artificially increase the price and reduce the return available to those who bought after the run-up began?

We found that there were no noticeable increases in trading volume among this year's Fool Four stocks. There did seem to be small jumps in the share price for three of the Foolish Four stocks right at the beginning of January, but none were more noticeable than other ups and downs throughout the year. The Dow itself showed a similar bump. Stock indices frequently show increases in early January, leading some to speculate that there is a "January effect" on stocks generally.

The impact of the "January effect" is another debate. On the "too many followers" question, the trading volume and price patterns provided little evidence that high yielding Dow stocks were artificially inflated at the beginning of the year.

Last week, I promised to look into Unit Investment Trusts (UITs), which invest in the Dogs of the Dow as a group and then offer the various combinations (the Dogs of the Dow 10, the High Yield 5) as individual securities. Unit Investment Trusts are like mutual funds but structured differently. One way to look at the impact of UITs is to look at institutional investing as a whole. If institutional investors own most of a Dow company's shares, then how could a bunch of individuals following the Foolish Four or RP4 or other Dow Dividend Approach possibly have that much of an effect?

In fact, most Fool Four companies' shares are held by institutions. The average institutional holding for this year's Fool Four stocks is 65.25%. The highest is International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, which has 69.1% of its shares held by institutions, and the lowest is Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>, with 60.7%.

For example, the largest institutional shareholder of Eastman Kodak is Merrill Lynch, which owns 23.65 million shares, followed by Barclays Bank, which owns 9.35 million. Together, they own over 10% of Eastman Kodak's float (the number of shares outstanding minus insider holdings). As a result, it's unlikely that individual investors buying a hundred shares or so each, at different times, can affect these stocks' prices that much.

Moreover, institutional shareholders aren't behaving uniformly towards the high yielding Dow stocks. The number of institutions owning shares in Fool Four stocks ranges from the 344 that own Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> stock to the 1,230 that own Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>. This variety indicates that few of the institutions owning Philip Morris own it because it's a Dow Dog -- if they were, they'd own Union Carbide, too.

Next week we'll look specifically at unit trusts and see if we can determine their impact. Until then, a couple of things seem clear: individual investors following Dow Dividend Approach strategies are unlikely to make a major impact on stocks that are 65%-owned by institutions. Secondly, if investors are worried about the jump in Fool Four prices that occurred in the first few days of this year, they should simply buy their stocks in mid-December and avoid the New Year's rush!

Current Dow Order | 1998 Dow Returns

11/05/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +2  1/8   45.06 
 IP   +1  3/16  46.50 
 MO   -   1/16  53.56 
 EK   +   3/16  76.69 
 
 
                    Day   Month    Year 
         FOOL-4   +1.73%   4.39%  15.77% 
         DJIA     +1.51%   3.76%  12.74% 
         S&P 500  +1.36%   3.20%  16.84% 
         NASDAQ   +0.74%   3.71%  16.99% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     76.69    26.63% 
  12/31/97  276 Philip Mor    45.25     53.56    18.37% 
  12/31/97  289 Int'l Pape    43.13     46.50     7.83% 
  12/31/97  291 Union Carb    42.94     45.06     4.95% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15797.63  $3321.75 
  12/31/97  276 Philip Mor 12489.00  14783.25  $2294.25 
  12/31/97  289 Int'l Pape 12463.13  13438.50   $975.38 
  12/31/97  291 Union Carb 12494.81  13113.19   $618.38 
  
  
                              CASH    $754.73 
                             TOTAL  $57887.29