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. (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. (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 (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. (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||(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|
- 4 Stocks With Low Graham Numbers -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
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%|
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.
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.