January Comes On Strong

The equity markets put on a nifty fireworks display in the first four weeks of the year, with both the Dow Jones Industrial Average (up 5.8%) and the S&P 500 Index (up 5.0%) turning in their best January performances in nearly two decades. The Dogs of the Dow strategy had an even more impressive showing. An equally-weighted position in the 10-highest yielding Dow stocks at the end of 2012 would have advanced 6.1% in January. If history is any guide, all of this augurs well for the rest of the year. Using the S&P 500 as a proxy for the market, returns have averaged about 7.5% a year since the 1950’s. But, in those years with a positive showing in January, stocks gained about twice as much, on average.

Leading the Pack

Hewlett-Packard (HPQ Free HP Stock Report) took the brass ring the first month, advancing an impressive 15.9%. This was the top performance not only among the so-called Dogs, but of all the Dow Industrials. The stock’s move serves to illustrate the contrarian nature of the Dogs strategy. HPQ made this year’s list largely because of the big tumble it took last year. Investors headed for the exits in 2012 as the computer maker reported steep losses due to writedowns in the second half, sending its shares to their lowest level in a decade. Indeed, its 44.7% drop was the worst among the Industrials. But, because of the decline, and the fact that the dividend was kept intact, it became one of the top-10 highest yielding issues in the DOW and thereby a full-fledged Dog. Although we look for the company’s earnings to begin rebounding this year, H-P still has a lot of work to be done, and competition, particularly in personal computers, is likely to remain intense. Most recently, the company announced plans to restructure its Enterprise Services business in Germany. The move includes the elimination of about 1,100 positions and the closure of its site in Russelsheim.

Market enthusiasm has likely been stoked in the wake of competitor Dell’s (DELL) announcement that it would be going private. Even more so after Hewlett-Packard opined in a press release that “Dell's ability to invest in new products and services will be extremely limited. Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity." On top of all this, there’s been much media speculation over a potential breakup of all or parts of HPQ.

Other Winners

While we single out HPQ for its outsized advance, let us not forget some of the other puppies who behaved well. Among them Pfizer (PFE - Free Pfizer Stock Report), the world’s largest drugmaker, was up 8.8%. Its fourth-quarter earnings improved strongly over the prior year, mostly thanks to a $4.8 billion gain from the sale of its nutrition business at the end of November. But even excluding that one-time item and some nonrecurring charges, the bottom line more than doubled in the period. While Lipitor (which has gone off patent) continues to grab the headlines, improved contributions from Pfizer’s newer products and positive news from the pipeline lead us to believe better days are ahead for the company. Notably, key drugs such as Lyrica, Celebrex, and Prevnar 13 all reported double-digit growth during the fourth quarter.

Elsewhere, shares of McDonald’s (MCD - Free McDonald’s Stock Report) were up 8.0% in January as the restaurant operator reported better-than-anticipated fourth-quarter earnings. While the fast-food purveyor will likely face challenging operating conditions this year, menu innovation, compelling value and convenience, and new and remodeled restaurants should help drive a bottom-line gain of between 5% and 10%. Rounding out the top performers, shares of industrial and financial conglomerate General Electric (GE - Free GE Stock Report), rose 6.1% for the month.  Adjusted income from operations for the fourth quarter of 2012 came in at $0.44 a share, a penny ahead of the consensus and $0.02 above our call. All told, the full-year bottom-line tally came to $1.52 per share, a year-over-year improvement of 16%. Profits increased across all divisions: the jet engine branch led the way with a 22% uptick, while oil and gas rose 14%. GE's recent performance is even more impressive when taking into consideration the still-soft global economy and the fact that GE is unwinding certain aspects of its portfolio

It’s Been a Very Good Year

From a historical perspective, January’s 6.1% advance for the Dogs of the Dow would be a pretty decent showing when stacked up against most full-year returns. As such, it wouldn’t be at all surprising if some of the more conservative readers might be tempted to cash in their chips and sit out the rest of the year. That, of course, is every investor’s prerogative, but it would go against the tried and true Wall Street adage of “letting your winners run”. While we don’t have a crystal ball to consult, even if these stocks only tread water for the remainder of the year, adherents to the Dogs strategy stand to rake in nearly 4% in dividends which should help smooth out any potential bumps along the way.  

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