Will Consumer Confidence Drive Up Depressed Stocks?

 |  Includes: AA, CVX, HPQ, TRV
by: MyPlanIQ

We are shifting gears away from dividend stocks to consider Alexander Crawford's contention that Consumer Confidence rising may benefit certain stocks. According to the Bloomberg Consumer Comfort Index, which ranges from -100 to 100, consumers are more "comfortable" than they've been in a year. The index rose to -39.8 from -41.7 in the middle of February. This news came out just as the Labor Department released news reduced first time unemployment claims.

To find the companies that might benefit from this, he ran a screen on the 30 stocks of the Dow Jones Industrial Average for those that appear undervalued relative to the Graham Number.

Graham Number = SQRT(22.5 x EPS x BookValuePS)

The contention is that stocks trading well below their Graham Number may be undervalued. Here are the ones with the biggest upside:

  • Alcoa, Inc. (NYSE:AA): Graham Number fair value = sqrt(22.5*0.55*12.96) = $12.66. Based on the stock's price at $10.35, this implies a potential upside of 22% from current levels
  • Chevron Corp. (NYSE:CVX): Graham Number fair value = sqrt(22.5*13.44*60.7) = $135.48. Based on the stock's price at $109.91, this implies a potential upside of 23% from current levels.
  • Hewlett-Packard Company (NYSE:HPQ): Graham Number fair value = sqrt(22.5*3.32*19.41) = $38.08. Based on the stock's price at $26.29, this implies a potential upside of 44% from current levels.
  • The Travelers Companies, Inc. (NYSE:TRV): Graham Number fair value = sqrt(22.5*3.37*62.31) = $68.74. Based on the stock's price at $58.66, this implies a potential upside of 17% from current levels

Any companies in the Dow 30 are big players that are not going to disappear overnight. The only one about which I have concern is HP (HPQ), but this is a list that is worthy of comparison with our dividend bearing ETF benchmark.

Asset Fund in this portfolio
REAL ESTATE (NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
Emerging Market (NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY (NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY (NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
High Yield Bond (NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
Click to enlarge

Portfolio Performance Comparison

Portfolio/Fund Name YTD


1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 2% 2% 21% 10% 77% 8% 54%
Retirement Income ETFs Strategic Asset Allocation Moderate 5% 3% 24% 19% 118% 3% 8%
4 Stocks With Low Graham Numbers 4% -12% -42% 18% 70% -2% -9%
Click to enlarge

This isn't a very appealing chart. We can see decent returns over the very short term and there is quite a lot of volatility indicated by the Sharpe numbers. It may be for those who believe in these companies that the upside is there, but I am not one that would invest in this selection in the short term. I would want to hear some compelling reasons why these companies are going to recover.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

The five year chart shows a down and to the right progression that I don't like. It's great to have a blind filter to select companies, but I think this is one I will reject. It will be interesting to follow progress over the coming year.

Disclosure: I am long CVX.

Additional 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.