Q–I’d like to invest in the Dow Five through a discount broker. How will I determine which are the Dow Five on a given date?
A–The Dow Five, also known as the Small Dogs of the Dow, the Flying Five or the Fab Five, is a simple enough strategy.
On the last day of any given year, you select the 10 highest-yielding stocks on the 30-stock Dow Jones industrial average. From these, you determine the five with the lowest stock price. Invest an equal dollar amount in each of these stocks and then hold them for one year.
Investing in the Dow Five since 1973 would have resulted in a handsome 20.9 percent average annual return, a reason for the growing popularity of this investment system.
“The Dow Five may actually be losing some luster because it’s becoming so popular, but it does force you to include yield and value in your portfolio,” observed Charles Carlson, contributing editor of the Dow Theory Forecasts newsletter in Hammond, Ind. “It doesn’t require a lot of trading or transaction costs, since you buy at the beginning of the year and hold all year.”
However, by investing in so few stocks, your risk is magnified because each stock’s movement makes a whopping difference, he cautioned.
The Dow Five is a variation of the Dogs of the Dow strategy. The latter, which involves buying the 10 Dow stocks with the highest yield at the beginning of each year and readjusting your portfolio a year later, has beaten the Dow Jones industrial average in 16 of the last 24 years. In the past five years, the Dogs have turned in an annualized 20.1 percent return, compared to 18.4 percent for the Dow.
Growing awareness about this methodology has resulted in a number of investment companies offering unit trusts based on the Dogs of the Dow. These can permit a smaller initial outlay and simplify the investment process, though critics contend fees are too high and an individual can do the job more efficiently on his own through a low-cost broker.
Q–I bought 50 shares of S3 Inc. last year and have been taking a beating ever since. Should I hold or sell?
A–This supplier of multimedia hardware and software to help computers display graphics more quickly and efficiently has had its share of problems.
S3 Inc. restated its financial results lower for the third quarter and nine months ended Sept. 30, 1996, after an internal review uncovered errors in the timing of the company’s recognition of sales to international distributors. Third-quarter net fell 51 percent to $4.4 million, or eight cents a share, compared with a restated $8.9 million, or 17 cents a share, a year earlier.
In addition, shareholders in several parts of the country recently filed class-action lawsuits against the company and certain officers and directors. The suits allege securities violations in the form of “false and misleading information” about the company and its prospects that artificially inflated the stock price.
They contend company insiders and their colleagues sold off more than 638,000 of their shares at inflated prices. They pocketed a gain of more than $10.8 million and the company was able to issue $100 million in convertible notes.
The analyst consensus on the stock of S3 Inc. is just a little better than “hold,” according to the Boston-based First Call Corp. That includes two “weak buys” and seven “holds.”
Its earnings are expected to decline 50 percent this fiscal year, compared to a 36 percent increase for the semiconductor industry as a whole. A 49 percent downturn is expected in 1998, compared to a 15 percent gain by its peers. A 15 percent annualized growth rate is expected for S3 over the next five years.
Q–Up until my retirement in 1989, I invested my IRA in Amcap, a growth fund. I start making my withdrawals in 1999. What’s your opinion of this fund?
A–It’s a rather generic large-capitalization growth fund run by price-conscious managers.
What’s different is that it’s team-managed, a characteristic of the American Funds family, which assures it won’t be limited to the biases of any one person.
The $4.4 billion Amcap Fund gained 22.77 percent over the past 12 months to rank at the midpoint of large-cap growth funds. Its three-year annualized return of 23.15 percent places it in the lower one-third of its peers.
“The objective of someone investing in this fund would be to find something kind of quiet and not likely to bounce around a lot, holding a portfolio of names you know,” explained Jennifer Newport, equity fund analyst with the Morningstar Mutual Funds investment advisory.
Its the top holdings were Time Warner, Comcast Special Class A, Fannie Mae, Walt Disney, Philip Morris, Medtronic, SLMA, Gillette, Norwest and Oracle. This Los Angeles-based fund requires a hefty 5.75 percent “load” (initial sales charge) and $1,000 minimum initial investment.
———-
Andrew Leckey, an anchor on the CNBC financial cable television network, answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J. 07450 or by e-mail at successinv@aol.com.
