The 3 Best Dow Stocks of August


Given that it's the last day of the month, and soon to be the last day of the summer, I thought it'd be useful to look back and examine the three best-performing stocks on the Dow Jones Industrial Average (INDEX: ^DJI) . While doing so shouldn't necessarily inform one's decisions to buy these stocks in particular, it's nevertheless helpful to uncover the levers that push stocks up and down.

1. Cisco Systems (NAS: CSCO)
The undisputed leader of the pack for the month of August is Cisco Systems, the Silicon Valley hardware manufacturer of routers, servers, and just about anything else that has to do with networking. For the month, its stock was up a staggering 18%, nearly twice that of the runner-up.

To say that the past few months have been a tumultuous period for Cisco's shareholders would be an understatement. Shares in the company fell more than 10% in a single day after the company reported earnings for its fiscal third quarter ending April 28.

While both revenue and earnings were up by impressive margins over the prior year, analysts were spooked by the company's cautious outlook going forward. On the quarterly conference call, Cisco's chief executive officer, John Chambers, noted that there was "significant uncertainty" in the global economy and deals were taking longer to close as a result.

But it's always darkest before the dawn. Almost three months to the day, on Aug. 16, shares in the company shot back up, recovering much of the lost ground. The catalyst this time was Cisco's decision to nearly double its dividend after beating expectations for the fourth quarter on both the top and bottom lines. The company currently trades for 13 times earnings and yields 2.9%.

2. Home Depot (NYS: HD)
The runner-up for August is Home Depot, the country's leading home improvement retailer, which notched an impressive 10% increase in its stock price. Like Cisco, the impetus for Home Depot's ascent was a strong earnings report. For the second quarter, top-line sales grew by 1.7%, domestic comparable-store sales were up 2.6%, and diluted earnings per share were up an impressive 17.4% on a year-over-year basis.

Three different factors appear to have propelled Home Depot's performance. First, it continues to pursue multiple operational and merchandising initiatives intended to streamline and improve the shopping experience. Second, the company reported a 17-basis-point increase in its gross margin due to supply chain efficiencies and a different mix of products sold. And finally, as my colleague Sean Williams noted, strength in homebuilders also helped, "as it now appears that consumer remodels, and the commercial side of Home Depot's business, are picking up."

Shares in the company are up 34% for the year, trade for 20 times earnings, and yield 2.1%.

3. Bank of America (NYS: BAC)
The third-place finish goes to Bank of America, the nation's second-largest bank by assets after only JPMorgan Chase. Shares in the lending giant are up 9.6% for the month.

To be perfectly frank, it's really anybody's guess why Bank of America performs the way it does on a monthly, weekly, or even hourly basis. In the middle of the month, the bank announced that that it had agreed to sell its non-U.S. wealth management business to Swiss lender Julius Baer for $882 million. As fellow Fool Anand Chokkavelu noted, while the deal is immaterial to B of A's assets and equity, "it's one more step in the right direction" as the company continues to pare down its balance sheet.

By the end of the month, however, its luck had seemingly turned back around after testimony in a conspiracy trial against three former UBS employees implicated B of A in a bid-rigging scheme in the municipal bond market. Following on the heels of that, moreover, were reports that the State of Florida had subpoenaed the bank for alleged participation in the ongoing LIBOR investigation.

Quite simply, because of its seemingly low stock price and potentially extreme undervaluation -- the bank trades at less than half of book value -- don't be surprised if B of A ends up at the top or bottom of the best-performing stocks in September as well.

Foolish bottom line
Although past performance is no indication of the future, it's always help to understand why stocks perform the way they do. With this in mind, I invite you to download a copy of our newest free report about three Dow stocks every investor should own. To claim your free copy while it's still available, simply click here now.

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Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Cisco Systems, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Home Depot. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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