Behind the Headlines
THIS MONTH: Unloved Dow stocks...Heir to the throne...
(MONEY Magazine) – FALLEN ICONS
The Dow's Dogs Could Have Their Day Again
Veterans of the '90s will recall the "dogs of the Dow" theory that buying the 10 Dow stocks with the highest dividend yield is a great way to get undervalued companies whose share prices will soon shoot up. As the theory gained popularity, of course, it stopped working.
But a look at today's list of unloved stocks reads like a who's who of 1990s heroes--and many appear ready for a comeback. "The parts of the Dow left for dead could present interesting opportunities," says Jack Ablin, chief investment officer for Harris Private Bank in Chicago. Among the dogs he likes: GE (GE), Pfizer (PFE), Coca-Cola (KO) and Johnson & Johnson (JNJ) (the latter are, respectively, the 11th- and 12th-highest yielders).
Ablin says the companies all pay healthy dividends, boast cheap stocks, and have businesses that won't slip if the economy does--a concern when the Fed can't decide whether to worry about inflation or declining growth. These stocks have an average yield of 3.1%, nearly double the yield of the Dow as a whole. "High-dividend payers are a good place to ride out this uncertain period with the economy," Ablin says.
Linda Duessel, senior portfolio manager and equity market strategist with mutual fund firm Federated Investors in Pittsburgh, agrees that many higher-yielding Dow stocks are a good bet. That's because a consumer company like Coca-Cola or a healthcare stock like Pfizer tends to hold up well in a blah economy. Tech, energy and financials, she says, may not.
The Next Bill Miller?
If Bill Miller's 15-year streak of beating the S&P comes to a halt this year--his Legg Mason Value Trust (LMVTX) fund was down more than 3.7% through early June while the S&P 500 was up 3.8%--who's likely to succeed him as champ?
Meet Manu Daftary. His Quaker Strategic Growth (QUAGX) fund has topped the S&P 500 for the past eight years, and so far in 2006 it's up 5.7%. Daftary's investment style is different from Miller's, but like Miller, he doesn't pursue a conventional strategy.
Miller is ostensibly a value investor who looks for cheap large-cap stocks, though his definition of value included Google's IPO (good call). Daftary is a "go anywhere" investor. He has recently bought stocks ranging from midcap oil driller Weatherford to big-caps like Nokia and General Dynamics. "We are constantly looking for ideas across all sizes and sectors," he says.
In other ways, Daftary tends to be more conservative than Miller. Daftary's top 10 holdings make up about a quarter of his fund's assets. Nearly 45% of Miller's fund is invested in his top 10. To minimize risk, "we like to spread the bets around a bit," Daftary says. He also tends to hold a lot of cash when he can't find stocks at prices he likes. Recently the fund had about a 30% cash position vs. Miller's 1%.