Autumn Starts With A Fall

October has a bit of a bad rap among stock market followers. Having played host to two of the largest equity declines in U.S. market history, namely those of 1929 and 1987, many approach the month with some trepidation. While the aforementioned declines certainly left their indelible mark on investor psyches, it’s a lesser known fact that, historically, September is actually the weakest month, on average.

But, history aside, October of 2012 provided little to cheer about. Indeed, this was the worst October showing for the Dow Jones Industrial Average since 2008. Performance wise, the Dogs of the Dow strategy didn’t provide any shelter, with the 10 stocks falling an aggregate 2.1%. This matched the returns of an equally-weighted position in all Dow 30 stocks, as well as that of the 20 issues excluded from the Dogs. Generally speaking, many investors were likely sitting on the sidelines watching to see which way the U.S. Presidential election would swing. On top of that, with job growth not picking up, and unevenness in the industrial and retail sectors it was difficult to muster up much enthusiasm for investing. Moreover, Hurricane Sandy added an unwanted exclamation point to an already uninspiring backdrop.

Bucking The Trend

Of course, the news wasn’t all bad. The notable high point for the Dogs (and for all of the Dow issues, for that matter), was the successful spinoff of the former Kraft Foods’ North American grocery and wholesale foods business, into the new Kraft Foods Group (KRFT). The remaining snack and food brands now operate under the Mondelez International (MDLZ) moniker. In terms of unlocking shareholder value, the combined price movements of KFT and MDLZ provided a hefty 9.5% increase for October.  (As a reminder, although not Dow components, we will include the performance of KFT and MDLZ until the end of 2013 in keeping with the buy-and-hold nature of the Dogs of the Dow trading system.)

The healthcare giants made up the rest of the mutts that managed to stay on the plus side. Specifically, Johnson & Johnson (JNJ Free J&J Stock Report) was up 2.8%, Merck & Co. (MRK - Free Merck Stock Report) 1.2%, and Pfizer (PFE - Free Pfizer Stock Report) squeaked out a .1% advance. In the case of JNJ, the company reported solid third-quarter earnings driven by increased sales in its Pharmaceuticals and Medical Device & Diagnostic divisions, prompting investors to lift the shares to within a hair’s breadth of their all-time high.  Merck’s earnings also exceeded expectations, with a solid assist from significant reductions in overhead costs. Although company sales will likely continue trending down, due to the patent expiration of its blockbuster Singulair product, margin strength and impressive growth in other core products recently lifted the stock to a four-year high. It was a similar story with Pfizer. In its case, its cholesterol-fighting drug Lipitor lost its patent a year ago. Despite a double-digit decline in sales, extensive cost cutting has helped maintain an earnings uptrend, and its shares are also carving out new multiyear highs.

Temporarily In The Pound

These few positives aside, several Dog stocks took it on the chin for the month, dragging down overall performance. Most notably, shares of DuPont (DD - Free DuPont Stock Report) tumbled 11.4%, after the diversified chemical manufacturer reported third-quarter results that fell well short of the prior-year period. Performance suffered from volume declines in both the Electronics & Communications and Performance Chemicals businesses, especially in the Asia/Pacific region. Meanwhile, normally stolid AT&T (T - Free AT&T Stock Report) stock dropped 8.2% following mixed third-quarter results that included far less-than-expected additions to the mobile contract customer count. Elsewhere, General Electric (GE - Free GE Stock Report), which had been the top performing Dog for the year through September, also lost power, to the tune of 7.3% of its market value. The main drag was likely top-line figures which came up short of expectations, but a good portion of that was due to negative exchange-rate effects. Finally, Intel’s (INTC - Free Intel Stock Report) woes continued. September-period sales and earnings both fell short of the comparable year-ago tallies as demand for chips remained lackluster. Its shares took a 4.5% hit for October, leaving them down 10.8% for the year to date.

The Year So Far

Despite the occasional hiccup along the way, the Dogs have fared relatively well, as a group, for the year through October, posting an overall gain of 9.9%. Leading the pack have been Kraft/Mondelez (up 21.2%), Merck (+21.0%), and General Electric (up 17.6%). Meanwhile, an equally-weighted investment in all 30 Dow components would have increased 10.1% in value. But, as we always hasten to point out, the Dogs yield about a full percentage point more than the rest of the Industrials; enough to keep them in front by a nose in this year’s race.
As we wind down to the final weeks of 2012, barring a significant correction, it would appear that the Dogs of the Dow should finish the year in good form, and stand a fairly even chance of beating a position in the 30 Dow Industrials as a whole. Next month, we’ll have a heads-up look at the most likely candidates for 2013’s Dogs. Stay tuned. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.