You've heard my take on the five winners in the Dow Jones averages yesterday. Now let's enter the house of pain. Let's deal with the five biggest losers, or so called Dogs of the Dow, although considering that no stock besides the disgraced GE (GE) is down more than 7% there aren't a lot of dogs to round-up. Maybe GE, with a 44% decline in its stock, is all that can fit in that doghouse. Maybe it's the biggest doghouse imaginable. A veritable kennel of pain. But one that might, at last, be overdone on the downside for now, at least for now.
I want to go into reverse order, taking the bottom five from strongest, so to speak, to weakest, meaning GE is dead last. Who's number five? Verizon (VZ) , the cellphone and telephone and now internet company. We are all conditioned NOT to buy higher-yielding stocks once the Fed starts a tightening cycle. But this stock has roared 8 points from the middle of November, when it became full speed ahead for fed hikes, and it shows no real sign of quitting. Maybe it's the 4.5% yield? Maybe it is starting to win back customers it lost to other carriers? It's difficult to tell why there's been this advance and I am chalking it up as just a reversion to the mean. Nothing at Verizon was all that bad for it to have smashed down to the low forties at the beginning of the year, but it zoomed from $44 to $53 in heartbeat at year's end. It still finished the year down but it did close up the gap and finished the year minus .06 percent. It's up including dividends. All I can say is that you could do worse than owning Verizon for steady income and decent performance in 2018.
The Fourth worst stock is Merck (MRK) down 4%. I find that odd given that this was THE year of Keytruda, their anti-cancer drug. But I think the principal cause for the weakness is the desire for all active portfolio managers to flee drugs because the economy is so hot. Merck is just a casualty of the rotation, although there was a time when Merck had so many irons in the fire that its stock could have transcended the cycle. Not this time but its safe 3.4% yield gives you some nice protection.
Third from the bottom is the stock of Exxon-Mobil (XOM) off 7%. First before we just chalk it up to being an oil company, Chevron Texaco (CVX) was up 6.54%. Chevron had a number of big projects coming on line and it has a bigger quarterly dividend than Exxon: $1.08 versus 77 cents. But, because of the disparity of performance Exxon now has a bigger yield, which gave a saving grace. Even though oil was up 30% for the year I have cooled somewhat on this group because I fear that one day the sector will be considered the equivalent of tobacco. If you really want yield and you want oil, may I suggest MLP like Magellan Midstream Partners (MMP) , which yields 5% and takes oil out of the pipeline starved Permian. I had thought that Exxon, with a fabulous balance sheet would have bought low when so many good oil companies were on the ropes, but it did not take advantage of the huge selloff and that's proven to be a big mistake. It is too late now.
It was a sensational year for tech of all kinds, cloud, software, hardware, you name it. Except for IBM (IBM) , with a stock down 7%. This is a company that has made many small acquisitions to augment its business and become a premium cloud play with all sorts of analytics attached to it. IBM's goal was to make the company more reliant on strategic growth products that no one else had in order to offset the decline of the traditional businesses. IBM did introduce a new mainframe and that will boost earnings this quarter and take the pressure off CEO Ginni Rometty to retire.
Look, IBM remains a great, innovative company and it caught a much needed upgrade today which emphasized how the company benefits from a weak dollar and has historically performed well at the start of a new mainframe cycle. IBM has amazing proprietary products. But it is up against Amazon (AMZN) Web Services, Google Cloud (GOOGL) and Microsoft (MSFT) Azure, which are run in the public cloud. IBM only has private cloud services. I think that's holding them back. Nevertheless they think their encryption that comes from the private cloud will ultimately raise sales because they have the cyber security edge over the other guys. Seems like a good selling point if you ask me.
I think IBM has re-invented itself many times and will do so again, we just don't know the timeframe other than it isn't quick enough for many portfolio managers, including Warren Buffett, who has been jettisoning the stock in spectacular fashion. Maybe he's done selling. Its rally today shows that this dog can hunt even if Buffett still has stock to go. With a 3.76% yield for protection I think it's a buy after the profit-taking I expect tomorrow after today's gain.
Finally last, and really least, is GE with a stock that's down 44%. It takes a special kind of industrial to be down that much in this environment. First, let's be clear, the company refuses to be introspective about what happened to hurt shareholders so badly and I do hope that new CEO John Flannery explains why the company couldn't do the $2 this year that it promised at the end of 2016. If he walks us through it and takes the big writedown we are all expecting, it will be greeted positively.
The difficult thing for Flannery will be charting the roadmap that's needed to maintain the dividend as it is and not having to cancel it because the losses in so many divisions are too great.
Flannery's got to sell assets and perhaps sell them fast as it might be a stretch for the company to make half of what former CEO Jeff Immelt was trumpeting just a few months before Flannery took over.
The one bit of good news here? While Immelt used to say GE's earnings were indifferent to which direction oil went, it's now, because of acquisitions and disposals, pretty much of an oil related enterprise where sales do much better as energy rises. I think that Flannery is prompting GE Baker Hughes for a sale to raise cash to help pay for the dividend. To get the best value he should sell it piecemeal and get better prices but the clock is ticking.
I doubt Flannery will be as bad as Immelt in terms of his acquisitions and disposals as, sadly, Immelt set the benchmark for terrible M&A. But unless Flannery starts writing down idiotic acquisitions like that of Alstom's power division and comes to grips with the shocking shortfalls I fear it could be more of the same.
The GE story is sad and I think will remain sad until the cash flows pick up. I am keeping it on a tight leash for my trust, and I have issued more mea culpas than I have ever done for any stock but I want to see what Flannery lays out before owning up and getting out. I can't believe that GE's as bad as the stock signals but I have been wrong all the way down. A fresh start with a recognition of the wrongs that were committed would go a long way toward establishing the credibility this company needs for its stock to return to the twenties where it probably belongs if it can stem the bleeding and solve the bigger issues, like debt, like pension, like long-term care obligations and of course power, oil and infrastructure. Yep, that's a big list of to-dos and he has to do them to save this company.
I am not a huge believer in the dogs of the Dow, an old saw that says you can buy the worst and expect something good to happen. Nevertheless, I think on yield alone Verizon, IBM, Merck and Exxon can hang in there and work higher. And I am holding my breath about GE, ever hopeful that Flannery will fix it like he did the company's health care division and bury the demons of years past.