Over the last couple of months, I have been experimenting with a ranking algorithm designed to predict fluctuations in stock price. To read about the ranking algorithm itself, please read my Instablog post. At the market close on September 16th, I executed my ranking algorithm on the Dow Jones Industrial Average components, and it returned a 1 through 30 ranking along with a potential portfolio for an investor wanting to hold only long positions. In this series of articles, I reveal the rankings and give a brief explanation for every stock in the index.
1. Kraft Foods Inc. (KFT) 46.47% of the portfolio
Kraft Foods is by far the best stock in the DJIA to buy according to the ranking algorithm. This stems mainly from Kraft raising its fourth quarter guidance on August 4th, and having a stock price increase less than one percent over the next month. I believe that this lack of performance will be compensated for over the coming months. In addition, Kraft announced on August 4th that it intends to split into two companies: a North America grocery store business and a global snack company. Although I do not believe that this necessarily adds significant value to Kraft stock, I believe the company will continue to have a strong strategic understanding of its business and will continue to grow internationally.
2. McDonald’s Corporation (MCD) 23.80% of the portfolio
McDonald’s stock had excellent performance in August as shares increased, even though the market took a hit. From March 18th to September 16th of this year, McDonald’s shares increased by 20.28 percent while the market dropped by 4.53 percent. McDonald’s is viewed as a “recession-proof” stock since more people are perceived to eat at McDonald’s when the economy is down. The ranking algorithm ranked McDonald’s stock so high because analyst opinion and trading activity has not changed with McDonald’s' recent market outperformance, suggesting that shares will continue to rise. For more information about why I think McDonald’s is a good buy, please read this article.
3. Procter & Gamble (PG) 11.21% of the portfolio
Procter & Gamble has historically been a good stock to hold, although shares have not made a full recovery since its precipitous drop to under $46 in early 2009. What makes P&G a good company is its control of distribution channels, its leverage when negotiating prices, and the power of its various brands. My ranking algorithm believes that Procter & Gamble’s expected consistency and growth is not well represented by its stock price, and now is a good time to buy shares rather than later.
4. Verizon Communications (VZ) 8.69% of the portfolio
In early August, I placed a buy recommendation on Verizon, using different metrics that my ranking algorithm uses. Since, Verizon has slightly outperformed the market, and I believe that it is still a good stock to buy. Although it does seem like Verizon Wireless-- which is Verizon’s big earnings driver-- may not be able to grow further after AT&T’s (T) anti-trust lawsuit, Verizon shares may begin to look more like power company shares, where stockholders receive high dividend rates and stock price growth around that of GDP growth. This may not necessarily be a bad thing in today’s uncertain market, which can explain why high dividend stocks are generally beating the market.
5. The Coca Cola Company (KO) 6.17% of the portfolio
Coke is a growth company that is priced like a value company. I believe that Coca Cola as a business will continue to grow as a company as the developing world grows, and Coke’s substantial investments in the developing world begin to pay off. Coca Cola is one of the most praised stocks by analysts. Of the 18 analyst opinions reported on Yahoo! Finance, 7 analysts recommend Strong Buy, 8 recommend Buy, and 3 recommend Hold, with zero sell recommendations. Although these analyst ratings are not a part of my ranking algorithm and I don’t recommend buying stocks just off of analyst opinion, Coke has a virtual consensus opinion that it is a good stock to have in a portfolio, which is the main reason why it is ranked so high by my ranking algorithm.
6. Bank of America (BAC) 3.65% of the portfolio
Bank of America is the only stock in the suggested long portfolio that has not outperformed the market over the last three months, dropping more than 30 percent during this time. However, there are two big reasons why B of A shares are still good to buy. First, Bank of America is believed by many to be “too big to fail” and has a very low chance of going bankrupt, although the stock is priced like it has a very high chance of bankruptcy. If Bank of America can bounce back from its recent losses, investors could experience huge gains like those that we saw after the financial crisis during 2009. Second, investors seem to believe in Bank of America from a trading activity standpoint. Warren Buffett’s investment in Bank of America suggests that he believes in its future, which in itself can greatly improve its outlook. In addition, Bank of America stock has the lowest short ratio in the DJIA at 0.6. Although this is due in large part to high trading volume, this suggests that bear investors are done selling off Bank of America and that its shares will bounce back soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.