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Although neither were on the Foolish Four list the day we started our portfolio, Sears and Goodyear were on the list frequently last year and many of you bought one or both of these stocks. The results have not been pretty, especially for those who bought early in the year before they began the steepest part of their slide.
Since both stocks were tossed off the Dow last November, the "official" Foolish Four policy has been that if they aren't on the Dow, they shouldn't be purchased or renewed. That isn't advice, by the way, it's simply an explanation of how we conducted the backtest that established the Foolish Four's effectiveness. We've never tested a strategy of renewing stocks that were dropped from the Dow. In the long run, strictly following the strategy is probably the best bet, but my mail indicates that a lot of people are looking for reasons to renew these stocks.
I confess that if I were holding Sears and Goodyear and they were coming up for renewal, I wouldn't have particularly good feelings about them. Both of the stocks are trading well below where many Foolish Four Investors bought them. They are definitely not quick turnarounds.
On the other hand, Ethan Haskel's research into Repeat Offenders shows that stocks that renew tend to do very well their second year. And we have seen nothing to indicate that being tossed off the Dow is some kind of kiss of death. The Dow doesn't pick companies on the basis of stock price performance. They pick industry leaders who have shown strong, stable growth. Companies are dropped for many reasons including the need for the Dow to reflect an accurate mix of U.S. industries.
We are also looking into breaking the Foolish Four away from the Dow. The Beating the S&P strategy indicates that the high-yield/low-price formula is effective when applied to an alternative list of blue-chip stocks, and the Dow's recent changes in favor of low-yielding stocks leads me to think that it may no longer be the best list of stocks from which to pick our Foolish Four. Given that, what's so bad about sticking with Sears and Goodyear?
As always, the decision is up to you, of course, but I wouldn't try to talk anyone out of renewing either or both of those stocks for another year. Dow or no Dow, they are classic Foolish Four stocks -- beaten-down blue chips with the staying power to turn themselves around.
One word of caution: Don't get misled by the idea of "getting your money back" from these stocks. It's tempting to hold a bad stock until it "breaks even," but a more productive way to make such a decision is to ignore what has happened in the past and look at the stock today. Is it a good buy at today's price?
If you sell a stock, today's price is what you will get from it and is all that will be available to invest in an alternative company. So the only question is, Which company is more likely to go up from here? Sears, which has been down for months, or a company that may be new to the Foolish Four?
Before you ask, I don't know the answer to that, I merely suggest it as a question to ask yourself as part of the decision-making process.
Foolish Four purists and those who believe mechanical investing strategies should be strictly followed can disregard the above discussion. It's really only for those of us who can't resist the idea of "improving" things.
Fool on and prosper!