Dow Underdogs for 2019

02/11/2019 5:00 am EST

Focus: STRATEGIES

Charles Carlson

Editor, DRIP Investor

A favorite strategy of mine is to buy Dow “Underdogs,” the stocks in the Dow Jones Industrial that have performed poorly over the last 12 months but are (hopefully) poised for rebounds in the New Year, explains Chuck Carlson, dividend expert and editor of DRIP Investor.

The strategy, which is featured in one of my books (Winning with the Dow’s Losers), doesn’t win every year. Indeed, General Electric (GE) was the Dow’s biggest underdog going into 2018, and the stock followed a bad performance in 2017 with a terrible performance in 2018 and was subsequently booted from the index.

Still, the strategy has worked fairly well over longer periods of time. Underlying the strategy is the idea of “reversion to the mean,” that the sort of blue-chip stocks that frequent the Dow typically have the ability to rebound following an extended period of underperformance.

So what Dow stock represents the biggest Dow Underdog for 2019? Goldman Sachs (GS), the investment bank and financial-services firm, was down roughly 34% this year. These shares have gotten worked over due partly to their sensitivity to financial-market performance.

Also, the firm is embroiled in a legal battle with Malaysia over a government-controlled fund in which Goldman arranged financing. However, the stock appears to be discounting at least some of the potential troubles. Indeed, these shares trade at less than seven times the 2019 earnings estimate of $25.23 per share.

Please note that Goldman Sachs is one of the few Dow stocks that doesn’t offer a dividend reinvestment plan. Thus, if you want to play my Dow Underdog strategy with Goldman Sachs, you’ll need to buy the shares via a broker.

Also, the strategy’s risk is amped up by buying just one stock. A more conservative way to play the strategy would be to buy the five or 10 worst-performing Dow stocks and hold them for the next 12 months.

The stocks below were the 10 worst-performing Dow stocks in 2018. (The stocks are listed in order starting with the worst performer for 2018.) These stocks represent the Dow Underdog selections at the beginning of 2019.

Goldman Sachs (GS)
IBM (IBM)
DowDupont (DWDP)
Caterpillar (CAT)
3M (MMM)
Exxon Mobil (XOM)
United Technologies (UTX)
Chevron (CVX)
Travelers (TRV)
Home Depot (HD)

Outside of Goldman Sachs, all of these stocks offer either a traditional DRIP or a direct-purchase plan. Investors who want to follow this strategy can visit my free website  at www.dowunderdogs.com .

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