SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
Related Articles
Don't pick winners -- avoid losers
Black eye for the blue chips
The stealth stock-market rally
Related Resources
Create your own stock search
SuperModels
Recent articles:
• February holds the key to investing in 2005, 2/2/2005
• Cycle analysts aim to call the market turns, 1/26/2005
• No quick cure for asbestos stocks, 1/19/2005
More...
| | SuperModels
A better index: the Diversified Dow 18
Over time, the Dow Jones industrials have outperformed the S&P 500 and the Nasdaq. But I think you can pull from three big Dow indexes to generate even better returns.
By Jon D. Markman
The Dow Jones Industrial Average ($INDU) has been around a very long time, but it still can't get no respect.
Criticized for being too small to represent the stock market with just 30 names, or too old-fashioned with a lot of rusty manufacturers and cranky banks, it has been marginalized in recent years by snobs who prefer the broader, flashier S&P 500 ($INX) as a market benchmark.
And so it is fairly amusing that, despite its many woes, the Dow has beaten the fancy pants off the S&P 500 -- and every other market proxy -- since 2000. If we look back to, say, 1985, the Dow is still the champ. To be specific, with dividends reinvested, the Dow is up 733% since 1985 and down 7% since 2000. The S&P 500 is up 570% and down 18% in those two spans, while the Nasdaq Composite ($COMPX) is up 649% and down an even 50%.
Ignoring the fads
One of the beauties of the Dow is that its creators are loath to change it much to suit the whims of the day. Unlike the S&P 500, which has regularly booted its members to make way for flavors of the month with little ceremony or rationale, the Dow rarely shakes up its party. And if you look back a few years, you can understand why.- On Nov. 1, 1999, Dow Jones editors thought they were being very clever when they added Microsoft (MSFT, news, msgs), SBC Communications (SBC, news, msgs), Intel (INTC, news, msgs) and Home Depot (HD, news, msgs) to their list. Since then, the four have sunk 36%, 42%, 43% and 20%, respectively. Meanwhile, two of the stocks that were ousted to make room -- Sears Roebuck (S, news, msgs) and ChevronTexaco (CVX, news, msgs) -- are up 104% and 60%, respectively. The other company removed at that time that is still publicly traded, Goodyear Tire & Rubber (GT, news, msgs), is down 55%. (Microsoft owns MSN Money.)
- More recently, on April 7, 2004, the managers of the Dow replaced International Paper (IP, news, msgs), Eastman Kodak (EK, news, msgs) and AT&T (T, news, msgs) with Pfizer (PFE, news, msgs), Verizon (VZ, news, msgs) and American International Group (AIG, news, msgs). And that didn't work out so well, either. The exiting stocks have averaged a gain of 13.6%, led by a 37% advance in Eastman Kodak, while the arriving stocks have averaged a loss of -13.3%, led by a 31% decline of Pfizer. Whoops.
At this time of unusual uncertainty in the market, I'd like to step in to save the Dow from itself. And, while I'm at it, let's review a method of playing the elder index that I first introduced six months ago that involves paring back the laggards from the list and focusing on its success stories. From an investment point of view, after all, we're usually better off choosing stocks that represent nothing so esoteric as the potential for the greatest earnings, revenue and price-appreciation growth over a reasonable time period -- say, six months.
An even better Dow
The last time I proposed that we use the Dow as a starter kit for a stock portfolio was, conveniently, six months ago. In my Aug. 19 column "Don't pick winners -- avoid losers," I employed the MSN StockScouter system to cut the Dow 30 down to a list of seven potential outperformers.
And succeed they did. As a group, my Dow 7 has advanced 17.4% since Aug. 19, about two-and-a-half-times better than the 7% gain in the Dow 30. The roster was Altria Group (MO, news, msgs), +41%; McDonald's (MCD, news, msgs), +26%; Exxon Mobil (XOM, news, msgs), +23%; Johnson & Johnson (JNJ, news, msgs), +18%; Citigroup (C, news, msgs), +11%, Honeywell (HON, news, msgs), +7%; and Procter & Gamble (PG, news, msgs), -4%.
My method of winnowing down the Dow 30 stocks now will be the same, except that this time, I will include the two other major Dow indexes -- the 20-stock Dow Jones Transportation Index ($TRAN) and the 15-member Dow Jones Utilities Index ($UTIL): I screened the MSN Money database only for the names in each group that were rated 8 or better by StockScouter -- and then removed stocks that appeared to be in long-term downtrends. Using data through the end of last week, 19 of these 65 stocks made the first cut. I then threw out the only stock with weak daily and weekly charts -- American International Group -- to arrive at the following 18-name list.
| The Diversified Dow 18 | | StockScouter Rating | Feb. 4, 2005 close | Daily chart | Weekly chart | | Dow Industrials | | | | | | The Home Depot (HD, news, msgs) | 8 | $42.42 | Barely positive | Barely positive | | Johnson & Johnson (JNJ, news, msgs) | 8 | $66.24 | Positive | Positive | | Altria Group (MO, news, msgs) | 8 | $67.00 | Positive | Positive | | Microsoft (MSFT, news, msgs) | 8 | $26.32 | Barely positive | Basing | | United Technologies (UTX, news, msgs) | 8 | $101.72 | Positive | Positive | | Exxon Mobil (XOM, news, msgs) | 8 | $55.29 | Positive | Positive | | Dow Transports | | | | | | J.B. Hunt Transport Services (JBHT, news, msgs) | 10 | $45.00 | Positive | Positive | | Yellow Roadway (YELL, news, msgs) | 10 | $56.31 | Positive | Positive | | CSX (CSX, news, msgs) | 9 | $39.45 | Positive | Barely positive | | CNF (CNF, news, msgs) | 8 | $46.49 | Barely positive | Positive | | Expeditors International (EXPD, news, msgs) | 8 | $56.31 | Positive | Positive | | Norfolk Southern (NSC, news, msgs) | 8 | $35.20 | Barely positive | Positive | | Dow Utilities | | | | | | TXU (TXU, news, msgs) | 10 | $74.86 | Positive | Positive | | PG&E (PCG, news, msgs) | 9 | $35.50 | Positive | Positive | | American Electric Power (AEP, news, msgs) | 8 | $35.65 | Positive | Basing | | Exelon (EXC, news, msgs) | 8 | $45.75 | Positive | Positive | | Public Service Enterprise (PEG, news, msgs) | 8 | $54.20 | Positive | Positive | | Williams Companies (WMB, news, msgs) | 8 | $17.64 | Positive | Barely positive |
|
The six from the Dow 30 are, through pure coincidence, a nicely diversified group all by themselves, with one retailer, one drug maker, one tobacco roller, one tech, one defense contractor and one energy producer. Can't beat that. The six from the transports index include two pure truckers, two railroads and two freight forwarders. The six from the utilities index are primarily diversified via geography, as there is one each from Texas, California, Illinois, New Jersey, Ohio and Oklahoma.
Whether the broad market succeeds or trades off over the rest of the year, my bet is that these 18 will outperform the 30 Dow industrials as well as the other major market indexes. If you'd like to propose another subset of the Dow 65 comprised of 20 stocks or less, please send them to me at jon.markman@gmail.com along with your rationale, and I'll track them over the next six months. Please put "Dow 65" in your e-mail's subject line.
Fine print
To learn more about the Dow Jones indexes, click here. . . . To invest in all the stocks of the persistently hot Dow Jones transports with a single security, you can buy the exchange-traded fund iShares Dow Jones Transportation Average Index Fund (IYT, news, msgs). It's remarkable that the index has done as well as it has when you consider it's weighed down by four airlines that have declined 28% to 45% over the past year. . . . The asbestos bill that I wrote about on Jan. 19 ("No quick cure for asbestos stocks") has been stalled again over the issue of silica poisoning. The plot thickens, and a resolution looks ever-farther away. Read about it here. . . . Back on July 28, I noted in a column ("Is Saudi Arabia running out of oil?") that a key factor in the rapidly rising price of oil was the lack of visibility into Saudi oil-producing capacity. So it was interesting to learn on Sunday that the Group of 7 industrial nations, at their annual meeting, urged OPEC countries and major oil companies to be more forthcoming about their reserves. According to Bloomberg, U.K. Chancellor of the Exchequer Gordon Brown said, "We need more information about oil reserves. Transparency in the oil markets is now something that is necessary." The finance ministers said they sought to replace guesstimates now made by consultants who track oil tankers because producing nations such as Saudi Arabia withhold the data.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in the following stocks mentioned in this column: Yellow Roadway, Microsoft, Home Depot, Expeditors International and Exxon Mobil.
|
