Hewlett-Packard: The Dow's top underdog

This trading strategy suggests buying each year's worst-performing stock in the index.

By TheStockAdvisors Jan 16, 2013 12:45PM
Stock index Image Source Getty ImagesBy Chuck Carlson, DRIP Investor

I first introduced my "Dow Underdogs" investment strategy in my book, "Winning With The Dow's Losers."

The strategy focuses on buying the worst-performing stocks in the Dow Jones Industrial ($INDU). History shows that the Dow's worst performers in one year tend to snap back strongly the next year.

The strategy proved its worth in 2012. The worst-performing stock in the Dow Industrials in 2011 was Bank of America (BAC), down more than 58%.

But in true "worst-to-first" fashion, the best-performing stock in the Dow in 2012 was -- you guessed it -- Bank of America, which rose more than 100% during the year.

Well, guess what stock in the Dow was the worst performer in 2012? Hewlett-Packard (HPQ). The shares were down 44%, far outpacing the 11% decline in the second-worst performer in the Dow in 2012, which was Intel (INTC).

Interestingly, Hewlett-Packard's dreadful 2012 performance followed a lousy 2011, when the stock declined 39%.

The upshot is that here is a Dow stock that has had a tremendous decline over the last two years and is set up for some "reversion to the mean" in 2013.

To be sure, Hewlett-Packard has plenty of problems -- weak earnings, stiff competition in its markets, lots of debt, and a lousy track record when it comes to acquisitions.

Still, while I'm not suggesting that investors fall in love with the stock, I am saying that Hewlett-Packard represents an interesting trade for 2013. The yield of well over 3% compensates while you wait for a rebound.

Please note that Hewlett-Packard offers a traditional dividend reinvestment plan in that investors must own a minimum 10 shares of Hewlett-Packard stock -- and have the shares registered in their own name -- in order to be eligible to join the plan.

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