Win with Dow Underdogs

A well known strategy is called "Win with Dow Underdogs". This means buying a basket of the Dow’s worst-performing stocks and holding them for a year. Successful examples are not rare: Philip Morris in 1999 (down 54% in 1999 because of lawsuits, up 109% in 2000); Microsoft in 2000 (down 63% in 2000 because of tech bubble burst, up 53% in 2001), and many more.

The same strategy can be applied to this years Dow underdogs,

                      HPQ           -47%
                      INTC          -17%
                      MCD          -12%
                    CAT         -4.2%
                    DD           -2.3%
                    AA           -1.7%

All the rest 24 stocks are up in 2012 (max: 104% BAC, min: 0.05% CVX). Apparently, HPQ is the biggest underdog in 2012. Can HPQ turn around in 2013? There is no need to repeat why HPQ had come to this case. Equity market in 2013 is likely strong: number of up/down ratio is 24:6; central banks are pouring low cost capital into markets; HPQ would not have more write downs in 2013; HPQ is cutting costs, hopefully quick enough; etc, etc.

The point is that when everyone knows what the problems are, then we need to come to realize what value is there. HPQ can be two types of stocks: an asset stock and a slower growth stock. It may be too early to name it a turnaround stock. But its diversified portfolio promises the cash flow won't stop soon. On the other side, lower expectation stops capital wastes. So there is no immediate danger of bankruptcy and sustainable working capital. If investors were disappointed in 2012, then they had learned should keep expectation low in 2013. As the bar is lowered, it is easier to exceed.

Analysts had speculated whether HPQ could be the winner in 2013, largely from historical the Dow Underdog thesis. It seems sound from value exploration stand point.