Looking Through The DJIA Rubble After A 4 Day Slide

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Includes: CSCO, DWDP, INTC
by: Jenks Jumps

Summary

I applied an 80/20 Volatility Resilience Filter to the DJIA after the August 24th correction to determine a starting point for research for my investment club.

The market's historical slide to begin 2016 and a passing suggestion by a CNBC analyst that the August 24th lows may be retested propelled another application of the filter.

Three components withstood the filtering criteria. Two would represent reinvestment for the club. The third possibility could be undergoing massive change.

It's just days before my investment club's first meeting of 2016. 2015 was the first time in years we didn't beat the market. Paradoxically, confirming the anxiety over needing to make up some hypothetical ground, the market has recorded its worst start to a year in its history. In the club's history, we've measured our performance based on total return. Accommodating the volatility projected for the coming year, a shift toward dividend growth investing was going to be a proposed focus in the near-term.

And then, a passing media comment on CNBC grabbed my attention. It advised investors to be prepared should the market revisit the August 24th, 2015 lows. It prompted a quick review of my previous filtering of the DJIA. Originally, I filtered the DJIA to ascertain the stocks that seemed to best withstand the volatility of the August 24th correction. Identifying the most attractive 20% of the thirty established a starting point for analysis. Four months later, as the year ended, I revisited the six to observe the effectiveness of attempting to determine volatility resistance.

The August filter initially returned four stocks in which the club already maintained investments - Proctor & Gamble (NYSE:PG), Boeing (NYSE:BA), Apple (NASDAQ:AAPL) and Cisco (NASDAQ:CSCO). Therefore, the next six companies from the filtering process were used as the 20% for a focus. The table below identifies those companies and buy points for each:

Component

Buy Point

52-Week High or One-Year Target

Potential Growth

Dividend

Potential Total Return

(NYSE:JNJ)

$93.74

$109.49

16.80%

3.20%

20.00%

(NYSE:MRK)

$54.51

$63.62

16.71%

3.30%

20.01%

(NYSE:GE)

$24.66

$28.68

16.30%

3.73%

20.03%

(NYSE:KO)

$38.60

$45.00

16.58%

3.42%

20.00%

(NYSE:MMM)

$140.34

$164.31

17.08%

2.92%

20.00%

(NASDAQ:MSFT)

$42.74

$50.05

17.10%

2.90%

20.00%

Comments from astute Seeking Alpha readers on the first article predicted reapplying the filter at different points in time would always produce a different set of results. And, indeed, that was true. The December review repeated three of the four components the club already owns - Apple, Cisco and Boeing. Adjusting for these three produced an updated six which are listed in the next table, again with buy points.

Component

Buy Point

At or Below

52-Week High or One-Year Target

Potential Growth

Dividend

Potential Total Return

(NYSE:PFE)

$31.35

$36.46

16.30%

3.72%

20.02%

MRK

$53.78

$62.67

16.53%

3.48%

20.01%

(NYSE:VZ)

$43.69

$50.27

15.06%

4.96%

20.02%

(NYSE:DD)

$59.30

$69.81

17.72%

2.29%

20.01%

(NYSE:XOM)

$71.96

$83.71

16.33%

3.68%

20.01%

MMM

$136.24

$159.71

17.23%

2.77%

20.00%

To incorporate the CNBC analyst's comment from January 7th into this filter of the DJIA requires a comparison of current closing prices compared to the day's low on August 24th. The table below highlights the remaining decline necessary in each stock to retest the August 24th low.

Ticker

August 24th, 2015
Low

January 7th, 2016
Close

Fallback
Percentage

(NYSE:AXP)

$71.71

$63.84

-12.33%

(NYSE:CAT)

$70.23

$63.94

-9.84%

(NYSE:IBM)

$143.00

$132.86

-7.63%

(NYSE:GS)

$172.10

$164.62

-4.54%

AAPL

$92.00

$96.45

4.61%

MMM

$134.00

$140.97

4.94%

(NYSE:UTX)

$87.17

$91.90

5.15%

(NYSE:WMT)

$61.50

$65.03

5.43%

CSCO

$23.03

$25.41

9.37%

(NYSE:DIS)

$90.00

$99.50

9.55%

(NYSE:TRV)

$95.21

$106.44

10.55%

MRK

$45.69

$51.96

12.07%

KO

$36.56

$41.62

12.16%

PFE

$27.51

$31.40

12.39%

XOM

$66.55

$76.23

12.70%

BA

$115.14

$133.01

13.44%

(NYSE:UNH)

$95.00

$112.09

15.25%

PG

$65.02

$77.18

15.76%

VZ

$38.06

$45.27

15.93%

(NYSE:CVX)

$69.58

$83.02

16.19%

(NYSE:JPM)

$50.07

$60.27

16.92%

JNJ

$81.79

$99.22

17.57%

(NYSE:V)

$60.00

$73.79

18.69%

(NYSE:NKE)

$47.25

$59.85

21.05%

(NASDAQ:INTC)

$24.87

$31.84

21.89%

DD

$48.01

$61.50

21.93%

MSFT

$39.72

$52.17

23.86%

(NYSE:MCD)

$87.50

$115.66

24.35%

(NYSE:HD)

$92.17

$125.40

26.50%

GE

$19.37

$28.97

33.14%

As shown, four components of the DJIA are already tracking below their respective August 24th lows - American Express, Caterpillar, IBM and Goldman Sachs.

The CNBC analyst recommendation seemed to imply it made more sense to be ready to jump on those stocks closest to the low. Apple, 3M, United Technologies, Wal-Mart, Cisco and Disney are within 10% of the mark. From another angle, one could assert the stocks furthest from the low are displaying the healthiest resilience to volatility and are worthy of investment. Seven stocks, Nike, Intel, E.I. DuPont, Microsoft, McDonald's, Home Depot and General Electric are all more than 20% from their August 24th lows.

The original filter can now be applied to the thirteen stocks identified. The next table contains the pertinent data including 50-day moving average, 52-week high and dividend yield.

Ticker

August 24th Low

January 7th Close

50-Day Moving Average

52-Week High

Dividend Yield

AAPL

$92.00

$96.45

$111.88

$134.54

2.03%

MMM

$134.00

$140.97

$153.05

$170.50

2.72%

UTX

$87.17

$91.90

$95.37

$124.45

2.66%

WMT

$61.50

$65.03

$60.38

$90.97

3.20%

CSCO

$23.03

$25.41

$27.00

$30.31

3.20%

DIS

$90.00

$99.50

$110.45

$122.08

1.35%

NKE

$47.25

$59.85

$64.54

$68.19

1.02%

INTC

$24.87

$31.84

$34.52

$37.49

2.84%

DD

$48.01

$61.50

$66.71

$76.59

2.28%

MSFT

$39.72

$52.17

$54.95

$56.85

2.62%

MCD

$87.50

$115.66

$116.50

$120.23

3.01%

HD

$92.17

$125.40

$132.50

$135.47

1.78%

GE

$19.37

$28.97

$30.47

$31.49

2.95%

Requiring a stock's 50-day moving average to have to move 25% or less to its 52-week high eliminates United Technologies and Wal-Mart. Eliminating stocks within 10% of their 52-week high knocks Microsoft, McDonald's, Home Depot and General Electric out of consideration. The criteria for a stock to bounce from its low to within at least 50% of its 50-day moving average benches Apple, 3M and Disney. Necessitating a dividend yield greater than half the average for the index eliminates Nike.

At this point, only Cisco, Intel and DuPont remain. The club does already have investments in the first two. Another dilemma for the club is a portfolio that is slightly overweight in the Technology sector. Yet, if adjustments are applied to the club's focus to value a growth in annual dividend income above other factors, Cisco and Intel do appear to be more worthy of further consideration.

Dividend growth investing does not purport ignoring valuation fundamentals or a company's stability and performance. Therefore, that deeper dive mentioned in December into the Dow (NYSE:DOW) and DuPont merger was the task at hand. This warning from Alessandro Pasetti is hard to ignore:

"I do not know if the deal will unlock $30bn of value as Dow suggests it would but it appears evident that the next three years could bring nasty surprises if you are going to hold onto your investment, particularly on the regulatory front."

As well, Arnold Frisch reasoned that:

  • the FTC does not like the destruction of competition,

  • the perks for management were not outlined, and

  • the distractions caused by the endeavor will not be able to be ignored.

Ultimately, he recommended:

"I hope you listen carefully, because if you do, you will have nothing to do with these companies until the smoke clears, and you will be happy that you left them to their misery."

Adam Hartung had similar reasoning including:

  • the three break-out companies will lack and severely miss product development, R&D and marketing,

  • the lack of competition will likely result in a loss of innovation, and

  • innovation that may emerge will be ill-managed.

His conclusion was simple:

"Nothing about this mega-transaction actually makes business better for anyone."

Reuben Gregg Brewer is equally disappointed in the merger plans:

"Only this time, the choice appears to be to toss in the towel instead of fight."

"They (Dow and DuPont) are just pawns in a financial game."

"Merging two struggling companies usually results in one bigger struggling company."

"Even if this deal doesn't happen, it looks like we could be looking at a sad ending for a company (DuPont) with such an incredible history."

Michael Boyd was not as wary as others during his analysis of the merger and subsequent three-part split. His conclusions, however, were not as rosy as management projections:

"At the low range of our sum-of-the-parts we get a valuation of $133B… exactly what we started with given the current enterprise values of both companies."

"I've found that most management teams tend to overpromise when it comes to synergies and underdeliver when it comes to executing them."

"I don't think either company deserves a buy at current levels."

Should the club still be drawn to the merger, albeit apparently akin to a moth to flame, this advice to buy Dow rather than DuPont from Fredrik Arnold will be recommended to the club:

"Collect your 3.57% annual dividends while you await merger and spin-off windfalls."

Cisco is under consideration because a potential bounce off its August 24th low looks appealing. The company has lost 6.9% since year-end. If Cisco drops below $23.50, it propels the dividend yield to over 3.5%. On the other hand, Intel's decline since year-end is 8%. As mentioned, it would still have to dive over 20% to reach the August 24th low which is, hopefully, unlikely. If Intel declined another 8% to $29.29, its dividend yield would then equate to 3.28%. In the end, it appears the recommendation will be to jump on any opportunity to reinvest in Cisco below $23.50 and Intel below $29.50.

Disclosure: I am/we are long AAPL,BA,CSCO,DIS,INTC,NKE,PG,V.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I belong to an investment club that owns shares in AAPL,BA,CSCO,DIS,INTC,NKE,PG,V