Overview: Dogs of the Dow
With it being a slow news period over the next couple of weeks and with 2018 just around the corner, we thought it would be a good time to explore the Dogs of the Dow strategy. In simple terms, the Dogs of the Dow strategy is to consider investing in the poorest-performing Dow components in the prior year with the hope they will make a nice rebound in the following year.
The strategy worked pretty well in 2017. The worst performers in 2016 were Nike (NKE) and Coca-Cola (KO), which were the only two stocks in the red. Other weak components that managed only small gains were Disney (DIS), Visa (V) and Home Depot (HD).
Their performance thus far in 2017 is as follows: V +45%, HD +41%, NKE +24%, KO +10%, DIS +5%. That's pretty good overall. The DJIA is up 25% on the year, so two of the five performed much better than average while one was in-line. Visa and Home Depot really posted big moves in 2017. In fact, Visa wound up being a Top 4 Dow Performer in 2017 and HD was not far behind. Even the two on the lower end (KO, DIS) posted decent but not great gains. But at least they are in positive territory. Overall, these five stocks seem to have held their own pretty well.
2018 Rebound Candidates: Let's turn to 2017 to reveal the dogs this year. First of all, we are excluding DowDuPont (DWDP), which was created via the merger of Dow Chemical and DuPont. The merger was completed on September 1, 2017, so it was not around on January 1 so let's put that name aside.
Of the remaining Dow components, by far the biggest loser in 2017 has been GE -44% and it's not even close. The next few worst performers have been: IBM -8%, XOM -7%, MRK -4% and VZ +0%. Over the next week or two, we will publish a few story stocks that look at some of these names individually. On a final note, in case you're curious, the biggest Dow winner by far this year has been BA +90%. Other big movers include: CAT +69%, AAPL +47%, V +45%, WMT +43%, HD +41%, MCD +40%.
Dogs of the Dow Spotlight: General Electric (GE)
Today we wanted to shine the spotlight on General Electric (GE). GE had a dismal performance this year with the stock down around 44%. It's now trading around $17-18 after starting the year in the $32 range.
In terms of quick background, GE is a global industrial conglomerate that operates in a variety of industries. Products range from aircraft engines, power generation and oil & gas production equipment to medical imaging, financing and industrial products. Its size is massive with an expected $124 bln in revenue in 2017 and nearly 300K employees.
The company has simply been performing poorly and has a bloated cost structure. It got so bad that investors, including activist investor Trian Fund Management, finally got their wish with CEO Jeff Immelt announcing in June 2017 he would step down. Immelt's long tenure (since 2001, taking over from Jack Welch) was initially seen as a positive as the world was entering the digital age.
However, Immelt's track record has been mixed at best. In fact, some have called it pretty bad and he should have been removed years ago. He let costs get out of control and made some questionable M&A decisions over the years. One of his biggest moves was having GE getting out of financial services (GE Capital), which once accounted for about half of revenue. Financials have been rebounding recently, so some question whether that was a good idea.
Also, GE made a number of questionable decisions. GE's recent $10 bln purchase Alstom's power unit was mistimed as the coal and gas markets have weakened. In fact, its power unit has really been struggling has its utility customers have been moving more to renewable energy sources, like solar. It also recently combined oil & gas assets with Baker Hughes to create BHGE, which is majority-owned by GE. That deal is already being seen as a mistake by some. Overall, GE has seemed to make big bets on markets that are declining, to the chagrin of investors. In addition to questionable M&A, Immelt has also been criticized for bloated costs, corporate perks and private jets.
In the past year, GE's struggles have gotten worse. This has led to the ouster of Immelt, its CFO Jeff Bornstein and several top executives. The new CEO is John Flannery and one of the first things he's doing is slashing costs. He has grounded GE's corporate jets and GE's new headquarters in Boston has been put on hold.
Some big steps were taken in November when GE slashed its dividend in half. It still pays a healthy 2.7% yield, but that will save a lot of money. Also, GE said it will decrease its board from 18 members to 12 next year and cost controls will be a bigger focus for them. GE also announced some job cuts, especially in its GE Power unit due to weak coal and gas markets. GE also said it plans some asset sales in 2018-19, including its transportation division and possibly its light bulb business. It's also considering "exit options" for Baker Hughes (BHGE), which is majority-owned by GE. These sales will follow already-departed businesses, including its NBC/Universal media units and its appliance business (sold to Haier China in 2016).
In a recent CNBC interview, Flannery says the whole company is being reviewed, from its culture to corporate spending. "Every stone turned. No sacred cows." He also said that cash flow for 2017 has been horrible but investors should not expect that to be the new normal. Cash flow has been falling for years. He said there are a number of steps GE will take in 2018 to boost cash flow.
In sum, as you can see, there are a lot of changes going on at GE. Probably the biggest change is the new CEO and new management team which seems to have a much stronger focus on cutting costs. That should be good news to GE shareholders. With GE down so much in 2017, the hope is that it will see a nice rebound in 2018, there is good potential here for a nice move in 2018.