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Dogs Maintain Their Edge

Equities have remained in favor among investors, with most stock indexes posting further gains in February. But the Dogs of the Dow strategy is having a particularly good time of it. An equally-weighted position in the 10-highest yielding Dow stocks from the start of the year would have been up 3.9% for the month. This compares with a 2.0% advance for a similar stake in all 30 Dow components and the somewhat paltry 1.1% gain from the 20 Industrials that didn’t make the Dogs. Moreover, February’s outperformance was even wider than the prior month, giving the mutts a further lead. For the year to date, the Dogs are now up 10.2%, versus a gain of 7.5% for a balanced position in each of the Industrials.

Hewlett-Packard Running Away With The Ball

One of the attractions of the Dogs of the Dow strategy is its mildly contrarian approach. All of the Industrials are high-quality companies with proven staying power. However, occasionally things happen whereby one or two have a particularly bad year (for any number of reasons) and their stock price takes an oversized hit. If the company maintains its dividend, then its yield (which moves in the opposite direction of price) becomes more attractive. The Dogs theory presupposes that these companies (and their shares) stand a good chance of bouncing back, and investors can profit from the rebound.

This year happens to have just one of those special cases. Computer maker Hewlett-Packard (HPQ - Free HP Stock Report) reported large losses in 2012 due to writedowns. This caused a 44.7% drop in its stock price, which hit its lowest point in a decade. That precipitous fall resulted in the issue’s making the Dogs list of top-10 highest yielding Dow stocks. Flash forward two months, and that formerly beaten down equity is now at the top of the heap. Through February, shares of HPQ had bounced back 41.3%, for the year to date, besting all the other Dow components (Dogs or otherwise) by an overwhelming margin.

A good part of the enthusiasm likely stems from the company’s better-than-expected results in the opening period of fiscal 2013 (which began November 1, 2012). H-P reported earnings of $0.63 a share, which exceeded management’s previous guidance of $0.34-$0.37. Earnings also compared favorably with the large losses booked in the final two quarters of fiscal 2012, which reflected writedowns for the company’s Autonomy software business and workforce reduction charges.

Other Good Pups

H-P wasn’t the only holding to make its owners proud so far this year. General Electric (GE - Free GE Stock Report) shares were up 10.6% through February. The industrial behemoth also came off of a good fourth quarter, but the company is being closely watched as it reshapes itself. Most of the headlines have focused on the trimming down of its finance arm, GE Capital, but there have also been rumors that it is in late-stage talks to buy Italian aerospace parts supplier Avio. That company’s roughly $2 billion in annual revenues could help jump-start the pedestrian sales growth that GE has been enduring of late.

Elsewhere, Pfizer (PFE - Free Pfizer Stock Report) stock gained 9.1% for the period in the wake of December-quarter results that exceeded expectations. Improved contributions from newer products and positive news from the pipeline lead us to believe that better days are ahead for the world’s largest drugmaker.

How High Is Up?

As we opined a few weeks ago, the Dogs performance in January alone (up 6.1%) would have been respectable compared with average historical full-year market returns. And being up 10.2% in only two months is just more icing on the cake. Of course, seasoned investors will know not to expect those sorts of numbers to continue. Indeed, with the Dow currently setting new all-time highs on a near-daily basis, some degree of profit taking is likely in the not-too-distant future. But overall, the general economic backdrop appears to be favorable for stocks, particularly with the Federal Reserve intent on keeping interest rates low to spur employment and GDP.

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