What was a very good year for the stock market turned out to be a not-so-good year for the Dogs of the CAPS, the mechanical stock picking strategy we've been following for the past seven years that combines the best of the Dogs of the Dow with the Motley Fool's proprietary CAPS stock rating system, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars.
Not that our own Dogs did terrible, as they were up more than 21% for the year, a return investors would usually be more than happy scoring for their portfolios. But when stacked up against some other mechanical strategies, as well as the Dow Jones Industrial Average and the S&P 500, the Dogs of the CAPS exited 2013 with its tail between its legs, the first time since we started keeping tabs it lost to everyone.
To recap, most investors have probably heard of the Dogs of the Dow strategy. Rank the dividend-yielding stocks of the Dow Jones Industrial Average from highest to lowest yield and buy the top 10. Hold for one year and a day and sell. Then do it all over again. Wash. Rinse. Repeat.
The Motley Fool put its own twist on the game by ranking those high-yielding stocks by price -- lowest to highest -- and buying just four of the top five (if the cheapest stock is also the highest yielder, it was thrown out because it was probably a real dog). While the Fool abandoned its Foolish Four strategy because of doubts about the efficacy of mechanically investing in stocks, some sites still track results, and with decades of results under its belt the Dogs of the Dow approach has a fairly impressive record.
When I first began investing, the Foolish Four was the way I first dipped my toe into buying individual stocks, so I've always had a wistful view of the strategy. But I thought adding the opinions of CAPS investors might be an interesting addition and began tracking what happens when only those Foolish Four stocks that earned a three-star rating or better on CAPS were bought. I figured it might just give us outsized performance.
The curious incident of the dog in the night
In general, the strategy has done quite well, but this year it was done in by a single stock: Hewlett-Packard (NYSE: HPQ ) , which had the best return of any stock on the Dow, nearly doubling in value over the past year. While the tech company made the cutoff for the old Foolish Four strategy, it's low two-star rating at the start of 2013 mandated we drop it from inclusion in the CAPS Dogs. That was the sole reason the competing strategy blew away all the others with a 44% annual gain. Notably, HP was booted from the Dow in September -- and still carries a low, two-star rating on CAPS.
Over the seven-year period we've been racing these dogs against one another our CAPS hounds have easily led the pack, averaging an 8% return, but that doesn't mean we're not licking our wounds now. Still, we'll be back again this year, adding four more dogs to our kennel and putting them to the test once more.
So which companies will we track this year? Here are the Dogs of the Dow for this year.
What's it all about, Wolfie?
Our CAPS Dogs will be Cisco, Intel, GE, and Pfizer, the same as the Foolish Four because they're all four-star rated stocks. I should point out that in the past I've said despite a soft-spot system I didn't follow mechanical strategies anymore. However, two years ago I started putting my money where my mouth was and bought the CAPS Dogs for my own portfolio, but with a further twist: I would only buy those that were the top rated, meaning four stars on CAPS or better.
While the first year that proved to be a drag on performance, it boosted my returns a little in 2013 because I excluded Ma Bell due to its three-star rating, giving me a 27% return for the year. I'll be doing the same thing again in 2014, but because I already own all four stocks that comprise the CAPS Dogs, I'll just be letting these dogs run.
A dog in the hunt
Still, as smart as our Foolish investors are, this is a contrarian investing strategy that tries to stand market wisdom on its head. Instead, you may want to check out what the Motley Fool's chief investment officer has found, selecting as his No. 1 stock for 2014 a stock that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.