AAII Investor Update: Should You Buy These 5 Dow Stocks?

Thursday, December 15, 2011
Charles Rotblut, CFA
AAII Journal Editor

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The more than 60 stock screens on AAII.com have been updated.

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Two stocks were sold from the Shadow Stock Portfolio.

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 40.2%, up 1.6 points
  Neutral: 26.2%, down 0.5 points
  Bearish: 33.6%, down 1.1 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

AT&T (T), General Electric (GE), Intel (INTC), Merck (MRK) and Pfizer (PFE) are currently passing our Dogs of the Dow: Low Priced 5 screen. This screen is tied for the year’s best-performing value strategy on AAII.com.

I bring this up to pose a question: Should you buy the passing stocks?

Before you answer, stop and consider what I have told you about them so far. They are among the highest-yielding stocks in the Dow, hence the screen’s “Dogs of the Dow” moniker. These stocks also pass this year’s top-performing value screen.

Based on this information, should you buy them? The answer is, it depends. How do these stocks look according to the criteria most important to you? Do they provide diversification benefits for your portfolio? Are you comfortable with their levels of volatility? How do the fundamentals look, especially those characteristics not factored in to the strategy’s limited criteria? Do the business models look good? What are the projected earnings? Are the passing stocks better than the stocks you currently own?

Yes, these are a lot of questions, but they should be asked. Just because these stocks passed a screen that is performing well this year, does not make them good buys. Perhaps you have concerns about Pfizer’s drug pipeline. Or maybe you are worried about GE’s exposure to Europe. Alternatively, after further research, you may decide that Intel looks good at current valuations. (For full disclosure, I own INTC, but this fact should not be relevant to your evaluation of the stock.)

I am bringing up the topic of what do with a list of stocks because this is the time of year when many publications and websites are issuing their top stock picks for 2012. Though the writers, we hope, put a lot of effort into their lists, there is absolutely no assurance that you will make money by buying those stocks. You need to do your own research.

The same advice holds true for any articles with headlines that contain a numeral, such as 5 or 10. Editors love headlines with numerals in them because merely including a number increases the odds of an article being read. Writers also like articles based on lists of stocks because they are easier to write. None of this means that articles containing lists of stocks will actually give you winning ideas, however. I would be very skeptical about articles with very assertive headlines such as “10 Winning Stock Ideas for the Next Decade.” (This is a real headline from an article on SeekingAlpha.com. Either the author was extraordinarily clairvoyant or he was trying too hard to attract readers.)

Though you should be cautious, realize that good ideas can come from just about any source. (I use stock screens and will look at some 2012 stock idea articles.) Just plan on jotting down any stocks that look interesting and then do your own research and analysis. You might just come across a great stock idea.

More on AAII.com

  • AAII Stock Screens – The stock screens on AAII.com have been updated through November 30.
  • Model Portfolios Updated – Two stocks were sold from the Model Shadow Stock portfolio, as explained below. Performance for the Shadow Stock, Mutual Fund and ETF portfolios have been updated through November on AAII.com.
  • What Do You Do With Stock Tips? – If somebody gives you a stock tip, what do you do with it? Tell us on the AAII.com Discussion Boards.

AAII Model Portfolios

Two holdings were sold from the Model Shadow Stock Portfolio—Books-A-Million, Inc. (BAMM) and Hastings Entertainment, Inc. (HAST)—due to negative earnings while on probation. No additional stocks were bought. Instead, the proceeds were used to purchase additional shares of Audiovox Corporation (VOXX) and Rex American Resources Corp. (REX), both of which are still passing the screen.

The Model Shadow Stock Portfolio gained 2.4% for the month. The Model Shadow Stock Portfolio beat both the Vanguard Small Cap fund (NAESX), which lost 0.4%, and the DFA US Micro Cap fund (DFSCX), which lost 0.6%. For the year, the Shadow Stock Portfolio is back into positive territory, gaining 1.5%, while the Vanguard Small Cap fund is down 3.0% and the DFA US Micro Cap fund is down 4.1%.

The Model Mutual Fund Portfolio was down 0.3% for the month. This compares to the Vanguard Total Stock Market fund (VTSMX), which was also down 0.3%. Year-to-date (through November 30), the Model Mutual Fund Portfolio is down 2.6%, while the Vanguard Total Stock Market fund is up 0.2%.

The Model ETF Portfolio was down 1.2%, once again matching the 80% SPDR S&P 500 ETF (SPY) and 20% iShares MSCI EAFE Index ETF (EFA) benchmark. Year-to-date, the Model ETF Portfolio is down 5.0%, while its benchmark is down 1.5%.

The Week Ahead

There will be earnings reports from 14 members of the S&P 500 next week. Included in this group will be Nike (NKE) and Oracle (ORCL) on Tuesday and Bed Bath & Beyond (BBBY) and Walgreen (WAG) on Wednesday.

The National Association of Home Builders’ December housing index will be the week’s first economic report on Monday. Tuesday will feature November housing starts and building permits. November existing home sales will be published on Wednesday. Thursday will feature the University of Michigan’s final December consumer sentiment survey and the final revision to third quarter GDP. November durable goods orders, November personal income and spending, and November new home sales will be published on Friday.

Richmond Federal Reserve Bank President Jeffrey Lacker will publicly speak on Monday.

AAII Sentiment Survey

Bullish sentiment rebounded to its first above-average reading since mid-November in the latest AAII Sentiment Survey. Bearish sentiment fell, but it continues to stay above its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.6 percentage points to 40.2%. This is the third consecutive weekly increase in optimism. It is also the first time since November 17, 2011 that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 0.5 percentage points to 26.2%. This was the third consecutive weekly decrease. It is also the 21st time in the past 22 weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 1.1 percentage points to 33.6%, a four-week low. Even with the decrease, bearish sentiment stayed above its historical average of 30% for the 5th consecutive week and the 37th out of the past 43 weeks.

Though there has been an improvement in bullish sentiment over the past few weeks, many investors remain cautious, and frustrated. Ongoing market volatility, slow economic growth, European sovereign debt problems and Washington politics are all continuing to fray nerves. Whether the current rise in bullish sentiment signals a turning point remains to be seen, particularly since optimism has not stayed above its historical average for a period of longer than four weeks since last February.

This week's special question asked AAII members what impact, if any, a possible extension of the payroll tax cut into 2012 would have on their six-month outlook for stocks. The majority of respondents said an extension would have no impact or just a small, though positive, impact. There were many members, however, who thought an extension would help stock prices.

Here is sampling of the responses:

  • “The payroll tax cut will have no impact on stocks.”
  • “None really, except that I think an extension would be helpful for consumer behavior.”
  • “If the tax cut is not extended, then I expect the market to decline, on expectations of lower earnings going forward.”
  • “An extension would be a slight positive for the market, with people having more money in their pockets to spend or pay down debt.”
  • “An extension would help the economy by increasing purchasing power. An improved economy should increase the value of stocks.”

» Take the sentiment survey

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor