Dow Underdog? Look at CAT

01/27/2014 8:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

The "Dow Underdogs" investment strategy is well-known. Chuck Carlson, editor of DRIP Investor, wrote the book on this subject, literally. His Winning with the Dow's Losers is now an investor classic. Here, he looks at how the strategy can be applied to this year.

"Dow Underdogs" investment strategy focuses on buying the worst performing stocks in the Dow Jones Industrial Average over the previous 12 months and holding for the next 12 months.

This strategy has a history of producing solid results, and 2013 was no exception. Indeed, the Dow's worst-performing stock in 2012—Hewlett-Packard (HPQ)—staged an impressive rebound in 2013 and was up nearly 100% for the year.

Had Hewlett-Packard remained in the Dow (the stock was removed when changes were made to the Dow components earlier in 2013) it would be the Dow's best-performing stock in 2013.

So, what Dow Underdogs look particular appealing for 2014? The two worst-performing stocks in the Dow in 2013 were Caterpillar (CAT) and IBM (IBM).

While both stocks should rebound in 2014, the one that looks most interesting is Caterpillar.

2013 marked the second consecutive year that Caterpillar declined. This lousy two-year performance seems to be setting the stock up for some mean reversion in 2014.

Caterpillar is the type of economically-sensitive stock that should rebound as economic activity improves globally. And the yield of nearly 3% enhances appeal. For investors looking for a turnaround play in 2014, Caterpillar looks especially enticing.

Please note Caterpillar offers a direct-purchase plan, whereby, any investor may buy the first share and every share directly from the company. Minimum initial investment is $250.

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