Laggards, Losers and Dogs: Dredging the 2013 Dow for Value

NEW YORK (TheStreet) -- I don't typically spend a great deal of time analyzing the mega-caps -- the largest and most well-known stocks -- primarily because these are well picked over by the dozens of analysts covering them. New information is simply difficult to uncover with so much focus on these companies, so I'd rather spend much of my research time on small, underfollowed and unloved stocks. However, I did find something interesting recently in a brief review of the stocks comprising the Dow Jones Industrial Average .

The DJIA has had a solid year, and the index is up 21% year to date. While some DJIA components, such as Boeing (BA), are up 80% year to date, it's the bottom ten performers that really interest me. These have all had below-benchmark performance this year. In fact, the average return of these companies has been a gain of about 5.5% (not including dividends), or about 8.75% on a total return basis. That's well under benchmark.

Call them the laggards, even the losers of the Dow, if you like. Don't confuse the laggards with the "Dogs of the Dow," the ten highest yielding Dow components at year end, although there will no doubt be some overlap: loser dogs. The naming of the Dogs of the Dow has become an annual event, and the investment results the following year for the Dogs have been compelling over the years. In fact there are ETFs devoted to the concept.

The laggards represent a slightly different spin.

There are just two Dow components that are in negative territory year to date, Caterpillar (CAT) and IBM (IBM). Oil is well represented in the laggards, as both Exxon Mobil (XOM) and Chevron (CVX) made the list. So did consumer oriented names Coca Cola (KO), McDonald's (MCD) and Wal-Mart (WMT). Rounding out the list are Cisco (CSCO), Verizon (VZ) and AT&T (T).


The most interesting part of this whole exercise is in viewing the group of worst-performing Dow stocks in portfolio terms. For instance, the 10 laggards have an average dividend yield of 3.2%, a solid number when you consider that the ten year Treasury yield, while rising, is still at 2.84%. On a trailing 12-month earnings basis, the group does not appear cheap at multiple of 20, but take out Verizon, which trades at 62 times trailing earnings, and the price-to-earnings ratio falls to 16.

On a forward basis, using next year's consensus estimates, the group of 10 trades for just 13 times earnings. Put it all together. You have a group of solid, well-known and very large companies, yielding 3.2%, and trading for 13 times forward earnings. That's a value-oriented portfolio if I ever saw one, and was a bit of a surprise too.

Of course, the trick will be to see how this group of laggards performs next year, in order to see if there's anything to this, and whether the exercise bears repeating.

It's not worth starting a new laggard ETF yet anyway. In fact, given Wall Street's constant effort to churn out new products, I can imagine a whole slew of new laggard products. Let's hope not.

At the time of publication, the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

  Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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