While the 'Dogs of the Dow' idea sounded good in theory, it arguably isn't the most logical way of investing. However, companies that have underperformed the wider index in a given year can sometimes offer better value for money on a relative basis. That's so long as their medium to long-term future remains bright.
With that in mind, here are three stocks that have been beaten by the ASX in 2014, but which could be stunning turnaround stories next year.
Santos Ltd
2014 has been a year to forget for investors in Santos Ltd (ASX: STO). That's because the company's share price has been hit hard by a falling oil price and is now down a whopping 49% since the turn of the year.
Looking ahead, though, the company could be worth buying a slice of. Certainly, concerns regarding its financial position look set to continue, with Santos having its credit rating downgraded to BBB by S&P, and the price of oil looks set to remain weak over the near term. However, a 49% fall in its share price since the turn of the year seems to be rather unjust – especially when Santos remains hugely profitable.
While it is hard to call the 'bottom' for any stock, Santos seems to offer good value for money at the moment. For example, it has a P/E ratio of 13.9 and a fully franked yield of 4.7%. For investors who can cope with further short-term volatility, Santos could prove to be a sound long-term buy.
Australia and New Zealand Banking Group
Underperforming the ASX to a lesser extent in 2014 have been shares in Australia and New Zealand Banking Group (ASX: ANZ). They are down 4.5% year-to-date versus a fall of 3% for the ASX, although their performance has been somewhat surprising.
That's because ANZ continues to trade at a sizeable discount to its sector and to the wider index, meaning an upward re-rating could be on the cards. For example, ANZ has a P/E ratio of 11.5, while the banking sector and ASX have P/E ratios of 13.4 and 14.8 respectively.
In addition to being relatively cheap, ANZ also has a beta of 0.9, which means that if the ASX does continue its decline, ANZ could outperform it over the next year. That's especially the case on a total return basis, since ANZ yields a whopping 6% (fully franked).
Wesfarmers Ltd
Aussie investors are somewhat nervous regarding the prospects for the supermarket and retail sector. That's a key reason why shares in Wesfarmers Ltd (ASX: WES) are down 9% since the turn of the year, with concerns regarding the development of the likes of Aldi and Costco marking down sentiment in the more established retailers.
A quick glance at the UK tells us why that's the case, with no-frills, discount stores eating away at more established supermarkets' market share. However, the UK is a different beast than Australia, since it has endured a number of years where consumer incomes have been heavily squeezed and, while the Aussie economy isn't having the best of times at the moment, further reductions in interest rates could make a real difference.
So, with a PEG ratio of 1.41 and a fully franked yield of 4.9%, Wesfarmers still looks like a buy that could have a much better 2015 than 2014.
Of course, finding the best stocks for next year is no easy task. That's especially the case if, like most private investors, you lack the time to trawl through the index in your spare time.
