Please ensure Javascript is enabled for purposes of website accessibility

Pigs of the Dow

By Philip Durell – Updated Nov 16, 2016 at 4:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You've heard of the Dogs of the Dow. How about the Pigs? They may be a better investment.

This commentary was first published on Feb. 19, 2004. It has been updated.

"Bulls make money, bears make money, but pigs get slaughtered" is an oft-quoted Wall Street saying. That may be, but here are some Pigs with a capital P that truly brought home the bacon, returning 51% in 2003.

The Pigs originated when I decided to track the five worst-performing Dow companies of 2002. My selection criterion was percent of stock price decline. The idea was to hold these -- Pigs of the Dow -- for a year, sell them, and reinvest the proceeds in the five worst-performing Dow companies of 2003.

Sounds like the Dogs of the Dow, you say? Yet these Pigs are no Dogs. In 2003, the Dogs returned 23.6%, which at first glance seems like a good year. Yet these mangy curs failed to beat the Dow index, whilst my porcine beauties doubled the Dow by returning 51%!

The Pigs of the Dow differ from the Dogs of the Dow and the Foolish Four strategies, both of which select companies based on those with the highest dividend yield at the end of the previous year. It is my premise that there are not enough Dow companies paying a significant dividend and that a strategy based on previous year's stock price decline would yield better returns.

For example, in 2002, Intel's (NASDAQ:INTC) stock price was cut in half, the second-worst decline of all Dow companies. Last year, it more than doubled, making it 2003's best-performing Dow company. However, Intel pays such a minuscule dividend that it could not qualify for the Dogs of the Dow. The lowest of the top five dividend yields in the Dow is 3.7%. There's a wide disparity with the highest yield of the bottom five of just 0.79%, and none of these companies is ever likely to qualify for the Dogs of the Dow.

The 2002 Pigs were Home Depot (NYSE:HD), Intel, McDonald's (NYSE:MCD), General Electric (NYSE:GE), and IBM (NYSE:IBM). They collectively declined in value by 43.6% during 2002. Below is a table of their individual performance compared with the Dow 30 and the Dogs of the Dow. All figures exclude dividends.

2002 Pigs of the Dow

Company

2002 Loss

12/31/02 Share Price

12/31/03 Share Price

2003 Gain

Home Depot

53.0%

$24.02

$35.49

47.8%

Intel

50.5%

$15.57

$32.05

105.8%

McDonald's

39.3%

$16.08

$24.83

54.4%

General Electric

39.3%

$24.35

$30.98

27.3%

IBM

35.9%

$77.50

$92.68

19.6%

Pigs Average

43.6%

51.0%

Dogs Average

23.6%

Dow 30

16.8%

8341.6

10453.9

25.3%



So what does this prove? Well, of course the Pigs had a great 2003, but can it be repeated? I can hear the statisticians and denizens of The Motley Fool's Mechanical Investing board saying back test, back test, back test! I am not a statistician, nor a mechanical investing adherent, but the Kua 'Aina Partners discussion board did help me go back seven years to 1997. During that time, the Pigs of the Dow had an average annual advantage over the Dow 30 index of 1.9% and an average advantage over the Dogs of the Dow of 4.1%. It doesn't seem much in the grand scheme of things, but compounded over several years that's a significant advantage.

Which companies are the contenders for Pigs of the Dow this year? The 2003 crop proved to be an easy selection as only five stocks declined in price during 2003. The companies are Eastman Kodak (NYSE:EK), AT&T (NYSE:T), Merck (NYSE:MRK), SBC Communications (NYSE:SBC), and Johnson & Johnson (NYSE:JNJ). Their performance year to date (YTD) suggests continued porcine superiority over both the Dow and its Dogs.

2003 Pigs of the Dow

Company

2003 Loss

12/31/03 Share Price

08/18/04 Share Price*

YTD Gain

Eastman Kodak

26.7%

$25.67

$29.40

14.5%

AT&T

23.3%

$20.03

$14.41

-28.1%

Merck

18.4%

$46.20

$45.11

-2.4%

SBC Communications

3.8%

$26.07

$25.44

-2.4%

Johnson & Johnson

3.8%

$51.66

$51.66

9.9%

Pigs Average

15.2%

-1.7%

Dogs Average

-6.1%

Dow 30

+25.3%

10453.9

10,087.6

-3.5%

* intraday

In his Dec. 2003 book entitled Winning With the Dow's Losers, Charles B. Carlson espouses exactly the same theory -- that buying each year based on the previous year's stock price decline will outperform the Dow. However, Carlson conducted far deeper research than my little experiment and researched figures all the way back to 1931. He calculated that such a strategy would have outperformed the Dow by an annual average of 1.2% over that time.

I still prefer my own research to any form of mechanical investing, and what Carlson has not accounted for is the frictional costs of brokerage fees and the tax costs of changing the portfolio each year. I tracked the Pigs of the Dow because it is a plausible strategy. However, to me the major flaw in the strategy is that companies do not simply become undervalued at year's end. Great companies can be undervalued by the market at any time of the year.

The Pigs may have brought home the bacon in 2003, but they could still be slaughtered in 2004!

If you are looking for great companies that are undervalued by the market, try the Motley Fool Stock Advisor.

Fool contributor Philip Durell, otherwise known as admiraltroll on the Fool discussion boards, owns no shares of any companies mentioned in this article and welcomes your feedback via email. The Fool has a disclosure policy.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$86.78 (-0.83%) $0.73
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$245.95 (-0.80%) $-1.99
AT&T Inc. Stock Quote
AT&T Inc.
T
$16.01 (-1.42%) $0.23
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$122.71 (-2.08%) $-2.60
Intel Corporation Stock Quote
Intel Corporation
INTC
$27.52 (-1.96%) $0.55
General Electric Company Stock Quote
General Electric Company
GE
$64.55 (-1.24%) $0.81
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$166.72 (0.33%) $0.54
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$270.94 (0.67%) $1.80
Eastman Kodak Stock Quote
Eastman Kodak
KODK
$4.84 (-1.22%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.