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Selecting Shelter In Dow Stocks From A Crash In The Dow Averages

Oct. 21, 2015 10:00 AM ET3 Comments
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We have been among the biggest bears on this site, having written about "Dow 7000" in 2007 and 2008 on other sites, and being in the camp that the Dow will pull back to 10,000 or 11,000 in what will be remembered as the crash of "2016," but is actually in progress as we speak.

If we're right, investors that bought stock at inflated levels prevailing recently stand to lose money. That stands even for a blue chip average like the Dow as a whole, but not for every Dow stock. Specifically, there are a minority of Dow stocks that are little, if at all, about 2008 levels, and therefore appear to offer an oasis of relative safety compared to others in the index.

One way of measuring the loss of money is through the loss of time. That is, if a stock goes down in price, what it is doing is going back to a lower level characteristic of an earlier period of time. Let's say that a stock goes back to a level last seen seven or eight years ago. Then, you could have saved that amount of time by buying the stock at the lower price today, rather than buying it at the same price in 2007 or 2008.

The Dow Jones Industrials are being used to illustrate the point, because it represents the most widely followed index and stocks. Others, who invest in different universes, can benefit by applying the same principles to the stocks they are more familiar with.

It has been said that "progress" consists of "two steps forward and one step back." While everyone likes the "two steps forward part," is not so desirable during the "one step back" phase that we believe to be upon us. Which is why we now put our trust in stocks that haven'tmoved up since 2008.

Among the hardest hit stocks this year are the energy stocks. Many of them prospered less than others during the six-year plus bull market, and they fell hard in August, reflecting the earlier retreat in oil and gas prices. Chevron (CVX) below 75? Exxon Mobil (XOM) below 70? Where have we last seen these prices?

www.dogsofthedow.com/dogs2008p.htm.

We are using the above source (Dogs of the Dow) for prices at year-end 2007 and 2008, and Yahoo Finance for "recent" prices as of the Tuesday October 20, 2015 close.

Here, we can see that the August lows in both stocks were below year-end 2008 prices, and even "recent" levels (of 89.99 and 80.83) are not above those of year-end 2007. But note one important difference: Recent dividend yields on Chevron and ExxonMobil were (4.69%) and (3.54%), respectively, versus (3.51%) and (2.00%) at depressed year-end 2008 prices, meaning that the companies have made dividend progress over this time.

Among relatively stable consumer goods stocks, WalMart's recent price (58.75) is not much above the year-end 2008 level of 56.06. There's one important difference between then and now: a dividend yield of 1.69% in 2008, and a yield nearly double that today. Similarly, the recent 74.43 price of Proctor and Gamble (PG) approximates the 2007 year-end level of 73.42, and is less than 25% higher than the 2008 year-end level 61.82 with a dividend yield nearly double that of 2007.

A similar, if decidedly weaker, buy case can be made for two telecom stocks, A T &T (T), and Verizon (VZ). A T&T (33.75) is no longer in the Dow, and Verizon (44.24) is trading around its year-end 2007 level. And these two companies have exhibited less earnings and dividend growth than the four companies above.

On the other hand, the following stocks may be particularly vulnerable, because their current prices are MUCH above the levels, not only of year-end 2008, but also year-end 2007. The prices are presented in the order of Stock (TICKER), (Recent price, 2007 year-end price, 2008 year-end price).

American Express (AXP) (76.95, 52.02, 18.55). The recent price is only moderately above the year-end 2007 level, but over four times the year-end 2008 level, meaning that it suffered greatly in the 2008 crash and may do so again this time around. Besides, credit contraction is a likely theme of the current crash.

Disney (DIS) (109.84, 32.28, 22.69). The current price is roughly three times that of year-end 2007, and five times that of 2008. It is a "fair weather" stock that will likely pull back in harder times.

Home Depot (HD) (122.86, 26.94, 23.02). The stock traded between $23 and $27 for most of 2008, and the current price is FIVE times that range. Besides, the housing boom appears to be just about over.

"Three M" (MMM) (144.19, 84.37, 57.54). The current price is nearly double the 2007 year-end price, and nearly triple the 2008 year-end price. And this former chemical company has developed so many "specialty" products that people sometimes forget that it is quite cyclical.

A similar, but decidedly weaker, case can be made for selling two defense stocks: Boeing (BA) (138.88, 87.46,42.67) and United Technologies (UTX) (93.66, 76.53, 53.60). These stocks have advanced quite a bit since 2008, but the uncertainties raised by the global political situation may well support their stock prices.

The above observations follow a principle learned managing stocks in emerging markets: "Go to where the trouble has been, not where the trouble will be." Or in blunter language: The time to buy is AFTER a devaluation or a crash, not before. All other things being equal, the idea is to buy stocks that have already crashed, and to sell the ones that (probably) will.

Disclaimer: This article is not a recommendation to buy or sell stocks in the Dow or elsewhere. These examples from the Dow are used only for illustrative purposes. See your own investment adviser as to the best course of action for yourself.

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