With the stock market hitting multi-year highs, people are afraid to be left behind. Which stock is still a bargain?
The "Dogs of the Dow” Theory
Historically, by holding the 10 highest yielding stocks of the Dow 30 Industrials, the "Dogs of the Dow" strategy outperformed the Dow Jones Industrial Average (DIA) over long periods of time. Below are those 10 stocks:
Above 200 MA?
AT&T Inc. (T)
Kraft Foods (KFT)
Johnson & J (JNJ)
E.I. du Pont (DD)
Pick the Winner from the Dogs
However, “Dogs of the Dow“ didn’t seem to work in recent years. I fine-tuned it by picking the best stock from this list using following three criteria:
- PEG Ratio:PEG ratios are used by investors on buying growth stocks at a reasonable price. If the ratio is less than 1, the stock may be undervalued. The lower, the better. In the list above, Chevron's and Intel’s PEGs are lower than 1.
- 200-Day Moving Average: Given that they reflect the collective wisdom of millions of investors, the markets may be the best prognosticator we have. Best stocks need to be traded above its 200 MA. After all, trend is your friend.
- Highest potential gain over the next 12 months: The 1-year target price estimate represents the median target price as forecast by analysts.
Star of the Dogs: Intel
Based on those three criteria, Intel is the best stock from the list: Low PEG, high potential return and traded above its 200-day moving average. Intel’s net income jumped 48 percent, mainly on strong demand from corporations for Intel's higher-profit server chips. Besides, Intel is flush with cash, and recently its board authorized the company to buy back another $10 billion in stock.
Direct Competitors Comparison
The following table from Yahoo Finance shows that Intel beats its major competitors and industry in almost every matrix:
Advanced Micro Devices (AMD)
Texas Instruments (TXN)
Gross Margin (ttm):
Operating Margin (ttm):
PEG (5-yr expected):
Stock dividends generally rise over time as companies prosper. With reasonable prices, selected high quality stocks look attractive for long-term investors.
Even though Intel doesn’t have a good dividend history, and might face stiff competitions from mobile chip companies such as ARM Holdings (ARMH), or even MIPS Technologies (MIPS), a surge in demand for tech products after a pullback in spending during the recession could send its stock 15% higher over the next 12 months.
Disclosure: I am long INTC.
Source: Intel Tops the Dogs of the Dow