Beware of Dogs of the Dow Stories

Before you buy these stocks, make sure they're really poised for a rebound.
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Predictably, we've started the year with many columns that tell us to buy stocks that were sure-fire losers last year. These columns rely on an inverted rule of physics, which states that what goes down must come up. And so a barrage of "Dogs of the Dow" type stories ensues. Magazines are soon populated by 800-word admonitions to buy the stinkers of 2007's stock market.

Now hear me out:

There is nothing innately wrong about sorting through beaten-up stocks for future winners. Every contrarian -- and every good investor is a contrarian -- does just that. But the key is that an article trumpeting a Dog of 2007's hope for a turnaround must be based on solid evidence or a detailed supposition.

The savvy investor has to see columnists go further than blind trust in that inverted rule of physics.

They Just Don't Get Buying Dogs

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Too often, and we unfortunately saw it in spades in

Barron's

this weekend, the reason given for the recommendation is vague and wooly, literally no better than "it is really down and

if

things get better, the stock will go up."

"The Great If." That can be fine, in these cases, if what follows is specific and doable. But if it's not? Well, then know you are hearing a profoundly strained justification for putting your money into a troubled stock.

Before getting to the iffy portion of the article, Barron's lays out the common theme:

"What did badly in 2007 might do well in 2008, because valuations in many depressed sectors are at multiyear lows. Single-digit price/earnings ratios are common in the financial sector, and stocks in many industries are trading at or near book value, a level that often proves to be a floor beneath stock prices."

Fair enough. But look at what passes for a forward-looking line about

Bear Stearns

(BSC)

: "If the worst is over at Bear Stearns, the stock could easily top $100 in the next year, and it might become a takeover candidate."

If the worst is over? Of course the stock will do well if the worst is over, but that's a little like saying a pitcher with a 10.73 ERA and elbow troubles in 2007 will have a great 2008 if the worst is over with his health and hopelessly hung curveball.

Talk about mealy-mouthed. If you are recommending a stock that had a dazzlingly troubled and incompetent 2007 as a Comeback Kid of 2008, the recommendation has to be on more solid footing than the worst "if the worst is over."

The same goes for all the banks and insurance companies on this list. After all, their involvement in subprime makes it difficult to assess their book values and dividend returns. Their book values might still be written in lemon ink.

In this same (open, gushing) vein, here is the great forward-looking thought on

American International Group

(AIG) - Get Report

: "If AIG can earn anything close to that $6.69 a share this year, the stock could hit $75 by year end."

Well, duh!

But, again, if you are truly going to buy this dog, you need more substantive confidence that its subprime woes are over, or at least manageable. If not, that $6.69 is written on sand and will go out with the undertow.

There's just one more overly tepid "iffy" reason for buying one of 2007's fallen angels, but it's a classic. Look at this final line about

Starbucks

(SBUX) - Get Report

: "If Starbucks shifts gears as McDonald's did a few years ago, the stock could benefit."

And if wishes were horses, then beggars would ride.

Look:

McDonald's

(MCD) - Get Report

is currently benefiting from a years-long effort to turn their stores around. What, specifically, is Starbucks doing to their stores? We don't hear. We are only told to put the deed to our house on the hope that, if Starbucks does what McDonald's did, it's all cool.

But there is nothing, I mean zero, in the paragraph about Starbucks that suggests in any way that Starbucks is doing it. We are told: "There could be rising pressure on management to scale back Starbucks' rapid domestic expansion in the face of cannibalization and falling returns."

But are you going to invest on the basis that there could be pressure? And if they scale back, then what? And what about all the other important factors that have gone into Ronald McDonald turning himself into the Comeback Clown?

In fact, in this morning's

Wall Street Journal

, we read all about how McDonald's is going to

install actual coffee bars in 14,000 American stores.

This article, so painfully typical of its genre, which we see all around us during the first weeks of a year, is called: "Ready to Bounce: 12 Stocks for the Year Ahead."

Just do The Business Press Maven a favor. If you are going to follow any of this advice, make sure that the "if" portion of the article is better than iffy. And if you ever read the phrase "if the worst is over," please crumple the document and throw it away.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers and a money manager before becoming a journalist who wrote The New York Times' "County Lines" column for six years. He also did back-up beat coverage of The New York Knicks for the paper's Sports section for two seasons and covered other professional and collegiate sports. He has contributed frequently to many of the Times' other sections, including National, Metro, Escapes, Style, Real Estate, Arts & Leisure, Travel, Money & Business, Circuits and the Op-Ed Page. For his "Business Press Maven? column on how business and finance are covered by the media, Fuchs was named best business journalist critic in the nation by the Talking Biz website at The University of North Carolina School of Journalism and Mass Communication. Fuchs is a frequent speaker on the business media, in venues ranging from National Public Radio to the annual conference of the Society of American Business Editors and Writers. Fuchs appreciates your feedback;

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