On Tuesday in this space I highlighted IBM (MorningWord 12/31/13: $IBM – Dog Of The Dow), as the sole member of the Dow Jones Industrial Average of 30 stocks that was set to close down on year, despite the stock’s nearly 9% rally in a straight line in the last couple weeks of the year after nearly making a new 52 week low.
Another stock in the venerable Dow that showed very similarly poor relative performance to both the broad market and the tech sector was CSCO, which much like IBM had been flirting with 52 week lows in early December only to see the stock rally nearly 11% in a straight line into year end.
But it wasn’t just tech under-performers getting a lift into year end in the Dow. CAT saw a sharp 10% rally into year end, while KO rallied almost 6% in the last 2 weeks of the year.
We view a lot of this price action as portfolio managers cleaning up overweights and underweights before the calendar turns. IBM and CAT are still 2 stocks that are on our radar as potential leaders on the downside in 2014, since they’re both companies that have shown significant earnings deterioration in the past year, and valuations that look cheap, but to us look more like value traps than real value.
Having said that, given the huge runs of some of the leading stocks in 2013, the “value” stocks like those in the Dow mentioned above could be beacons of safety for investors used to piling into the latest hot sector. However, not all ports of safety are created equal. We still think healthcare and certain large-cap tech (like CSCO or QCOM) are reasonable areas for defensive investment, while stocks like IBM or CAT are set up for failure no matter the broad investment environment.