MorningWord 12/22/15: Dog Days of December – $PG $VZ

by Dan December 22, 2015 10:12 am • Commentary

Last night on CNBC’s Fast Money Carter Worth of Cornerstone Research laid out the case for buying the “Dogs of the Dow”.  The strategy entails buying the worst performing stocks in the Dow Jones Industrial Average at year end with the hope for out-performance in the New Year.  Carter suggests buying the 10 (out of 30 Dow stocks) with the highest dividend yield (not exactly worst performing), which often occurs due to the weakness in the stock (lower the price, the higher yield of the dividend).  Watch here:

Carter makes the case that if you bought the ten highest yield Dow stocks at year end and held for a year, since 1990, you have tripled the performance of the Dow over that period.


Carter highlighted two stocks that fall into the ten that he thinks has a fairly technical set up on their own right, Proctor & Gamble (PG) and Verizon (VZ).

I rarely disagree with Carter’s technical picks (he is my go-to technician and an astute market prognosticator), and I could get behind PG as a part of the strategy detailed above in a basket, but as a standalone I find it non-compelling.  While the break of the downtrend has been impressive, I would argue that the stock has stalled at key technical resistance at $80, and a failure here could have the stock right back at the downtrend in the mid to low $70s:

PG 5 year chart from Bloomberg
PG 5 year chart from Bloomberg

Away from the technical set up, PG trades at 21x expected fiscal 2016 earnings that are only supposed to grow 7%, which would mark the highest earnings growth since 2011. I think current estimates are likely suspect as the company is expected to have their lowest sales since 2007, with an expected 13% yoy drop. PG could set up as a good short actually as 60% of their sales are expected from overseas, 25% last year came from Europe alone, and I am hard pressed to think that the Euro has any room to go higher as the ECB continues to ease and the FOMC is less accommodative.

VZ on the other hand looks fairly defensive with no exposure to a strong dollar as 100% of their sales are domestic, the company pays a dividend with a current yield of 5% and is essentially a utility.  From a technical standpoint the stock is sitting above important support at $45 going back to 2012, and while the stock has made a series of lower highs and lower lows since its 2013 highs, the upside downside risk reward scenario looks fairly balanced with hefty resistance at $50/$51 and support at $40:

VZ 5yr chart from Bloomberg
VZ 5yr chart from Bloomberg

VZ could set as a good super-yield candidate, long stock, short call or short strangles. We’ll look into this one more and see if any trades capture our fancy.