In early May, the Dow Jones Industrial Average was trading around 11,500 for the first time in years. Since then, it has backed off, and at the time of this writing, had dipped below 11,000. That's a drop of 6%. Ned Davis Research in Nokomis, Fla., keeps excellent statistics on stock market declines and bear markets. It finds that drops of 5% or more in the Dow have occurred 355 times since 1900, or an average of 3.3 times a year. Only 31 times did the decline worsen into a bear market, defined as a drop of 20% or more. A bear market occurs about once every three years, so more than 90% of all 5% declines don't turn into bear markets.
This recent decline in the Dow made me wonder: Is this an opportunity to buy the Dow's large-cap stocks? To find out, I ran the 30 stocks that make up the Dow through my guru analyses. Here are some of the Dow stocks that get a strong thumbs-up from at least one of my guru strategies. Of course, I've written about a number of the Dow stocks at one time or another in columns here, including some that I've liked recently, such as Procter & Gamble (PG - commentary - Cramer's Take) and Altria (MO - commentary - Cramer's Take).
You'll see that every stock that got high grades was liked by either the Peter Lynch strategy or especially the James P. O'Shaughnessy strategy, both of which I have based on the writings of their namesakes. Both strategies favor larger companies. The Lynch strategy looks at the price-to-earnings ratio relative to growth, which is a measurement of how reasonable the price is. A low P/E/G suggests the price might be a bargain. The O'Shaughnessy strategy favors plenty of positive cash flow and high yields, which suggest prices are in the doldrums and that the conventional Wall Street outlook for these companies is depressed. With both of these strategies, current prices appear lower than what their potential suggests, making this a time to buy. I'll focus here on some stocks I've never discussed in this column before.
Investing Activist Track: Coal Is the New Black 6/12/2006 2:05 PM EDT It's cool, goes with everything, and its related stocks have real assets behind them.
Investing Activist Track: Chapman Takes On Texas 6/9/2006 1:59 PM EDT Chapman Capital is back, and its 13-D filing on Carreker tells a bullish tale in vicious fashion.
Investing Why I Don't Like Preferred Stock 6/9/2006 11:11 AM EDT Quanta Capital's preferreds don't carry even the usual limited benefits of these instruments.
At the time of publication, Reese was long ExxonMobil, Intel, JPMorgan Chase, Verizon, Procter & Gamble and Altria, although holdings can change at any time.
John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.
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