If you have been following me for any length of time, you know I spend a lot of time researching and modeling various investment ideas and strategies. It interesting, often entertaining, and it keeps me off the streets.
I probably kill off ten genius ideas that were disasters once the numbers were crunched for every idea that I find that works.
One that I found last year was loosely based on the original Dogs of the Dow theory put forth by Michael O’Higgins some years ago. One simply purchased the ten highest yield members of the Dow Jones Industrial Average Index and held them for a year in that strategy.
It has narrowly outperformed the Dow for the past 20 years. It is a decent contrarian large-cap dividend-focused approach.
When I was a broker, this was a really popular strategy to pitch. It was large well-known companies with high dividends and high trailing returns. It was an easy sell most of the time.
Most clients lost money because they quit using Dogs of the Dow the first time the strategy underperformed.
It is still a decent large-cap contrarian strategy that should outperform over time.
What I tested was the idea of buying the five lowest price profitable companies in the S&P 500. I rebalanced the strategy monthly to make sure any companies that turned unprofitable on a trailing 12-month basis were sold pretty quickly.
I also limited the stock to those headquartered in the United Ste sot lower political and currency risk.
Even with the quicker rebalance, turnover was reasonably modest.
Over 20 years, this simple strategy outperforms the S&P by a wide margin $10,000 invested in the low price five is now worth about $249,000 compared to just about $45,000 if invested in the index.
It is not perfect. It does not outperform all the time, and it is very volatile.
But it does work and might make sense as a contrarian strategy that a bit more active than indexing or even longer-term holding as do in the bank portfolios.
This year’s low price 5 is an interesting mix of companies.
Lumen Technologies (LUMN), formerly Century Link, is one of the United States’ largest telecommunications carriers. Lumen offers IP and data services, including VPN data network, Ethernet, internet protocol (IP), content delivery services, and satellite television services from Direct TV.
While selection for the low-priced five is made on price alone, this stock is trading at just eight times earnings and less than seven times free cash flow.
We also were not looking for dividends, but this company pays 9.76% at the current price.
There is some intriguing institutional ownership in this stock right now. At Southeastern Asset Management, Mason Hawkins lifted his stake by 2.3 million shares not long ago and now owns almost 6% of the company.
Joel Greenblatt's Gotham Capital owns stock and was a buyer last quarter.
Goldman Sachs and O’Shaughnessy Asset management are also owners of the stock and were adding to their position in the third quarter of 2020.
General Electric (GE) also makes the list right now. Most investors are skeptical of the turnaround, but so far, GE continues to exceed analyst expectations. You can add me to the list of skeptics, but that's the beauty of using a quantitative approach.
Huntington Bancshares (HBAN) is on the list again. I am a big fan of this bank and have been for years.
I am an even bigger fan of the proposed merger with TCF Financial (TCF). This creates a top 10 bank with $168 billion in assets that will have the scale to compete with larger banks. Huntington plans to add value to the deal by cutting 37% of TCF's non-interest expense base and investing $150 million in technology at the combined entity over the next three years.
Once again, while we were not looking for dividends, we will be collecting a 4.86% dividend with this stock.
People's United Financial (PBCT) is another high yield bank that makes the low-priced stock list. The stock yields 5.5% and is trading at 11 times earnings right now. This bank has 450 branches in Connecticut, southeastern New York, Massachusetts, Vermont, Maine, and New Hampshire. The company was founded in 1842 and is headquartered in Bridgeport, Connecticut. Currently, Peoples United has about $60 billion in assets.
With an equity to asset ratio over 13, the bank has plenty of capital as we head for the exits of 2020. Asset quality has remained outstanding throughout the pandemic as nonperforming assets are just .51%.
Hanesbrands (HBI) is the final low-priced stock for the next year. Hanes is the market leader in basic innerwear and has an incredible portfolio of brands. Brands include Hanes, Champion, Maidenform, Bali, JMS/Just My Size, Polo Ralph Lauren, Playtex, DKNY, Donna Karan, Alternative, Gear for Sports, Hanes Beefy-T, Bonds, DIM, Sheridan, Bras N Things, Nur Die/Nur Der, Lovable, Wonderbra, Berlei, Abanderado, Shock Absorber, Zorba, Explorer, Sol y Oro, and Bellinda.
Underwear, bras, and socks are not cutting-edge stuff. However, they do need to be replaced from time to time, and odds are Hanes owns one of your preferred brands when the time comes.
Again, there is a dividend, and the stock yields over 4% right now.
I have no idea how this list will do next year. I do know that the strategy has beaten the S&P 500 solidly for a long time now.
I do like the mix of businesses as we head into 2021.