The Dogs of the Dow will be happy to put the September quarter behind them. A Dogs of the Dow portfolio (consisting of the top 10 highest yielding Dow issues at the start of the year) would have declined 8.3% during this stretch. Of course, most investors, regardless of what strategy they employed, had few qualms about turning the page after Wall Street put in its worst three-month performance since 2011. For instance, having an equally-weighted position in all 30 Dow components would have resulted in a loss of 6.6% in the third quarter. The 20 non-Dog industrials held up a little better, falling 5.7%. And among other broad-based market benchmarks, the damage was particularly severe on the NASDAQ, which saw its value shrink by 13.4%.
Swimming Against The Tide
Not surprisingly, bright spots were hard to find among the Dogs in the third quarter, as eight of the 10 stocks declined in price. Investors looking to ride out this rough patch generally had the most success by sticking close to the consumer. Even then, the two Dogs on the positive side of the ledger were kept on a tight leash. McDonald’s (MCD – Free McDonald’s Stock Report) stock took home best in show, but rose just 3.6% in price. Shares of The Coca-Cola Company (KO - Free Coca-Cola Stock Report) edged up 2.3%, good for second place among the Dogs. (For the Dow 30, as a whole, sneaker giant NIKE (NKE - Free NIKE Stock Report), was something of an outlier, climbing 13.8% over the three months.)
Incidentally, from an operating perspective, neither of these two global juggernauts has been setting the world on fire lately. Earnings at the fast-food chain declined 13% last year and the downward trend continued in the first half of 2015. Foreign-currency headwinds, the lingering ill effects of a supplier problem in Asia, and challenging competitive conditions are among the factors holding back the company. June-quarter results, though, did come in slightly better than expected, and a bottom-line recovery likely got under way in the September period, partly reflecting an easy year-over-year comparison.
Foreign-currency translations are also holding back revenues and earnings at Coke, with the latter likely to finish essentially flat for a second year in a row. Lackluster volumes, particularly for the Diet Coke brand, are another concern. As was the case at McDonald’s, though, June-quarter earnings came in modestly better than Wall Street had been expecting. This likely helped to rebuild some support for KO stock, which fell 7.1% in price during the first half of the year.
Meanwhile, both companies are now working through various strategic initiatives aimed at better positioning their businesses for the years ahead. McDonald’s, for instance, has a lot on its plate, including efforts to streamline operations, accelerate store refranchising, and make the brand more responsive to evolving consumer tastes. For its part, Coke has been characterizing 2015 as a transition year, as it executes various strategic moves (e.g., increasing marketing support behind brands, refranchising various bottling operations, investing in faster growing beverage categories, etc.) aimed at better positioning the company for the long term. In view of this activity, investors are likely wary to overreact to the quarter-to-quarter ebb and flow in operating results at either of these two consumer giants.
A Three Dog Race
The battle for the worst Dog of 2015 remains a three-dog race. Caterpillar (CAT - Free Caterpillar Stock Report), Chevron (CVX - Free Chevron Stock Report), and ExxonMobil (XOM -Free Exxon Stock Report) stumbled out of the gate in January and have lagged behind the rest of the pack for most of the year, as declining commodity prices and related concerns about the state of the global economy have sapped investor support for these equities.
The three slipped further behind in the September quarter. July and August were particularly difficult for the two international energy giants, as oil prices dropped steadily from week to week, with the price of west Texas crude, a key industry benchmark hitting a 2015 low in late August. Oil has rebounded in the intervening weeks, though it remains considerably below where it stood at mid-year.
Falling commodity prices are also taking a toll on Caterpillar, as miners and energy producers are spending less on the company’s earthmoving equipment. CAT stock was under pressure for most of the summer and took another hit in late September when management scaled back its 2015 revenue outlook. The company expects its top-line slump to extend into next year, with cyclical weakness in the mining, oil & gas, and construction industries again holding back results. In all, CAT stock dropped 22.9% in price during the September quarter, making it the worst-performing dog for the period. CVX stock still held this dubious distinction on a year-to-date basis, having fallen 29.7% since the start of 2015. Shares of CAT and XOM, by comparison, were off 28.6% and 19.6%, respectively.
The Big Picture
Heading into the 2015 homestretch, the Dogs and the Dow Industrials, as a whole, are in danger of suffering the first down year since 2008. Of course, the year-to-date losses, 10.0% and 7.8%, respectively, pale in comparison to the stomach-churning declines endured during that year, when the Dow 30 shed about one-third of its value. This lack of momentum aside, all of the Dogs, with the exception of General Electric (GE - Free GE Stock Report), get Above-Average or better marks for Safety. Too, the comparatively high yields offered by these stocks, both relative to the broader market and the other Dow equities, mean they will still likely have some appeal with conservative, income-oriented investors.