How Will These 7 Bargain Stocks Perform In The Long Run?

Includes: ADI, ALV, ETN, ITW, NOC, NYX, WY
by: MyPlanIQ

Dan Caplinger of the Motley Fool suggests 7 stocks that are cheap as a result of the recent downturn. Whenever there is a drop, there is always a discussion of bargain hunters coming in to snap up bargains -- can that work for long term investors? Certainly if there are strong dividend producing equities at bargain prices, it might be worth considering.

We examine this selection in the context of long term performance. We expect recent performance will be less than stellar but we look further back to see whether we can expect good long term performance or whether this is a set of equities that have volatile behavior which may be great for traders with a short term view.


Dividend Yield

1-Month Return

Illinois Tool Works (NYSE: ITW) 3.4% (24.7%)
Northrop Grumman (NYSE: NOC) 3.9% (21.7%)
Eaton (NYSE: ETN) 3.6% (21.8%)
Analog Devices (NYSE: ADI) 3.3% (21.8%)
Weyerhaeuser (NYSE: WY) 3.6% (22.6%)
NYSE Euronext (NYSE: NYX) 4.7% (20.4%)
Autoliv (NYSE: ALV) 3.6% (22.5%)

Source: Capital IQ, a division of Standard & Poor's. Returns from July 8 to Aug. 9.

We compare this with our benchmark ETF dividend portfolio that provides a greater degree of diversification.

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 8% 81% 11% 88% 10% 71%
Retirement Income ETFs Strategic Asset Allocation Moderate 8% 67% 5% 17% 4% 16%
7 Dividend Stocks on Sale August 2011 0% 1% 2% 5% 1% 0%

From a look at the numbers, this doesn't seem like an appealing portfolio. We see an increase in the returns over a three year period but a flat return over one and five years. This seems like a portfolio that does well in certain conditions but not in the long term.

Three Month Chart One Year Chart Three Year Chart Five Year Chart
I think that the graphs are more illuminating -- they show that this portfolio does well during a sustained recovery but seems to dive at the first sign of trouble. Perhaps this portfolio could be the canary in the coal mine alerting us to dangers that are ahead. For those with sterner constitutions, they may choose to take on a bargain portfolio with the realization that these companies are not going to just go away and there will be returns sooner or later. However, that is not our goal.

The diversified set of ETFs still does a good job of delivering good risk adjusted returns in a range of difference conditions.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.