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Summary

  • The Dow Jones Industrial Average has continued to climb to new highs in 2014, extending its bull market run into its sixth year.
  • Strong performance in June from Intel and Chevron helped this group to stay out in front while widening their lead for the year to date.
  • Meanwhile, Intel has taken the top spot, leading all Dow components through the first six months.

By Mario Ferro

A Mixed Bag for June

While the Dow Industrials have marched upward to new heights this year, it's notable that not all issues have participated in the run-up. Indeed, fully 13 of the 30 components that make up the index are showing losses for the year to date. This pattern was echoed in June's results, with 11 of the industrials seeing declines. However, there were enough blue chips advancing to lift the group, as a whole, by 1% for the month.

The Dogs of the Dow (the 10 Dow stocks with the highest yields at the start of the year) were not immune to the more selective nature of the market, with four of the 10 stocks backtracking a bit last month. But strong performances from a couple of names helped lift the group by 1.8% in June.

The Month's Leaders and Laggards

Topping the list was an impressive 13.1% advance in the shares of Intel (NASDAQ:INTC). The chipmaker's stock got a big lift following the company's pre-announcement that June results would be stronger than originally indicated. Specifically, management now looks for second-quarter revenues to come in around $13.7 billion, vs. its prior guidance of $13 billion. The improved outlook was due to a pickup in demand for personal computers, as many corporations have boosted IT-related spending in response to increased profits. (The company is due to release earnings on July 15.)

Also notable was the 6.3% gain posted by Chevron (CVX). The company reported first-quarter sales and earnings that fell short of the prior-year period, due to lower production volumes and weaker selling prices for crude oil. However, we suspect that rising concerns over unrest in Iraq (and the potential disruptions in oil supplies) have helped lift the stock in recent weeks.

On the other side of the ledger, the fact that the Dogs didn't have many notable areas of weakness contributed to their outperforming the remaining Dow components. Bringing up the rear were Verizon (VZ) with a decline of 2.1%, and General Electric (GE), which shed 1.9%.

Shares of the telecom giant appeared to have encountered a bit of profit taking in the wake of their 6.9% advance in May. Indeed, with Verizon's recent acquisition of Vodafone's (VOD) 45% indirect interest in VZ Wireless, we estimate Verizon's profits will be up over 80% this year, which would allow the company to post its highest share earnings in over 10 years.

Meanwhile, GE's March-period revenues and earnings came in short of 2014's results. However, last year's numbers included its stake in NBC Universal, which was sold to Comcast (CMCSA) in March, as well as a number of other entities that have since been discontinued and/or divested. The moves were part of the company's plan to simplify its portfolio as it strives to get back to its industrial roots, namely a focus on areas such as aircraft engines, power plant turbines, and oil and gas equipment. Comparisons to 2013's results will become even less meaningful when the company spins off its consumer credit card arm later this year. But we still like GE's prospects on a go-forward basis.

A Solid Year Overall, So Far

After a faltering start, the Dow Jones Industrial Average regained its footing in February and continued to tack on gains through the rest of the first half, reaching all-time record highs. Through June, an equally-weighted investment in all 30 of the blue chip stocks that make up the index would have shown an increase of 3.1% for the year to date. Although this is was a respectable gain this deep into the long bull market, a similar position in the industrials had advanced 16.5% over the same period in 2013.

Meanwhile, investing in only the 10-highest yielding industrials at the start of the year would have generated even better results. Through the first six months these "Dogs of the Dow" stocks were up 5.6%, topping the performance of the remaining 20 Dow components by an impressive 3.8 percentage points. Again, by comparison, the Dogs were up 20% at the halfway mark in 2013.

Note: The Dow Jones Industrial Average, a widely referenced market benchmark, was only up 1.5% through the first six months. This is because the index is price weighted, meaning higher-priced stocks will have more of an impact on its performance. As it turns out, the three highest-priced components, Visa (V), International Business Machines (IBM), and Goldman Sachs Group (GS), have been among the Dow's hardest-hit stocks so far this year, falling 5.4%, 3.4%, and 5.5%, respectively, thus weighing down the index's performance.

Intel Moves Out In Front

The aforementioned jump in Intel shares catapulted the stock to the top spot among the Dogs, with a cumulative gain of 19% for the year so far. It took over first place from Merck & Co. (MRK), which had been leading the pack through May. The drug maker came in flat for June, after shedding a percent or so in market value the previous month. However, it has clocked in gains of 15.6% through the first half, placing it solidly in second. Coming in at number three in this year's race is Microsoft (MSFT), up 11.5%, as investors appear to be pleased with the choice of Satya Nadella as the new CEO. Following close behind was Cisco (CSCO), which advanced 10.8%, which reported solid results for its April quarter.

At the tail end of the pack, we have GE, down 6.2% through June, and Pfizer (PFE), which was off by 3.1%. While GE stock has been in negative territory all year, Pfizer, it should be noted, was holding onto second place among the Dogs of the Dow back in February, but began to lose favor with investors as the company kept raising the stakes in its attempt to acquire British rival AstraZeneca (AZN). Its last offer in May came to around $120 billion, and has since been withdrawn. Pfizer management indicated that it had no plans to attempt a hostile takeover. Meanwhile, British regulations prohibit it from making another offer for six months.

Conclusion

When considering that not all of the Dow industrials are participating in this year's march into record territory, the Dogs' performance is all the more commendable. Generally speaking, it appears that equities are trading on the high side, though not excessively so. Although the Federal Reserve has continued to taper its bond buying, it has indicated that short-term interest rates will likely remain near zero for the time being, which should lend some support to equity values in the second half.

Source: The Dogs Of The Dow Widen Their Lead