Many readers are familiar with my “Dow Underdogs” contrarian investment approach, notes Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
The strategy, discussed in my book, Winning with the Dow’s Losers, focuses on the worst-performing stocks in the Dow Jones Industrial Average in a given 12-month period.
While no investment approach works in every market, this “worst-to-first” strategy has a pretty good track record over the long term. And the strategy has been particularly effective so far in 2021.
Indeed, the best-performing Dow stock thus far in 2021 is Walgreens Boots (WBA). Shares of this drugstore chain have risen 32%, far outpacing the 11% return of the Dow Jones Industrial Average.
The rebound in Walgreens follows two dreadful years for the stock — Walgreens was the Dow’s worst performer in 2019 and among the top three Dow Underdogs in 2020. Walgreens is benefiting from the market’s increased support for value stocks.
Given just how out-of-favor Walgreens stock has been in recent years, I would expect this rebound to continue for at least the remainder of this year.
The other two worst performers in the Dow in 2020 — Boeing (BA) and Chevron (CVX) — have posted decent showings in 2021. Chevron, up 22% so far this year, has benefited from improvement in the beaten-down energy sector. Boeing has risen a more muted 13% but is nevertheless running ahead of the Dow Industrials and S&P 500.
Interestingly, while the worst-to-first strategy is off to a very strong start in 2021 — an equal-weighted portfolio of the top three Dow Underdogs (Walgreens, Boeing, Chevron) is up 22% year to date — the idea of “mean reversion” on which the strategy has been built has been working in the other direction.
Indeed, the top-performing Dow stock in 2020 was Apple (AAPL), which rose more than 82%. Apple’s return nearly doubled that of second-place finisher, Microsoft (MSFT), which was up more than 42%.
So how has Apple done so far in 2021? Apple went from being the Dow’s best-performing stock in 2020 to among its worst performers in the first quarter of 2021.
Now, if I owned Apple I would maintain my position given what I believe is a solid long-term outlook for the company. But the stock is clearly working off the big gains of 2020 and could lag the market a bit in the near term.
If you were initiating a “worst-to-first” strategy today, what Dow stocks should you consider? The Dow’s three worst performers over the last 12 months are Merck (MRK), Verizon (VZ), and Intel (INTC).
While I have no problem with any of these three stocks — especially for investors looking for income and cash flow — I would preference Verizon.
Please note Walgreens, Chevron, Merck, Microsoft, Verizon, and Intel offer direct-purchase plans whereby any investor may buy the first share and every share directly from the company.
Boeing offers a traditional dividend reinvestment plan, which requires ownership of Boeing shares to be eligible to join the DRIP. Apple does not offer a DRIP, so shares must be purchased via a broker.
