The dogs of the S&P/ASX 200 (ASX:XJO) to back in the new financial year

We are in the home stretch to closing off what should be a robust financial year for equities and there’s no better time to have a look at a new investing strategy for FY19.

The “Dogs of Dow” strategy is a popular one among US investors as they look ahead to the new year and Aussie investors often adopt a similar strategy at this time of the year.

It’s a strategy that seems to work in most cases too. The idea is to buy the worst performing stocks on the Dow Jones Industrial Index for the year on the belief that they will rebound in the new cycle. After all, what goes down must come up, right?

But applying this strategy on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index doesn’t quite work as well for a number of reasons.

The key difference is that there are only 30 stocks on the Dow and each of these stocks are global giants in their own right. Their share of the US economy also significantly outweighs our blue-chip stocks, let alone the stocks at the smaller end of the top 200 index.

This means a rebound for the dogs of the ASX 200 isn’t as probable as the Dogs of Dow, although this doesn’t mean you shouldn’t have a closer look at our underperformers, particularly given that our bull market is looking a little long in the tooth.

The fact is, so-called “value” stocks, or stocks that are trading at a discount to the market, tend to outperform only in a mature bull market.

While it would be silly to buy all the value stocks underperforming the index, there are a handful that I believe are well placed to rebound in FY19.

One underachiever I like is seed and crop protection products supplier Nufarm Limited (ASX: NUF). The stock has fallen 7% over the past year and is lagging the top 200 stock benchmark by 16%.

A profit downgrade on the back of bad weather has weighed on the stock but I believe its new omaga-3 enriched canola seeds will fire-up its earnings from FY19.

The second laggard worth backing is building materials supplier Boral Limited (ASX: BLD), which has fallen 6% over the past year as it too disappointed investors on the profit front while a potential capital raising hangs over the stock.

Boral could tap shareholders for an additional $150 million to $200 million to fund the buyout of its joint-venture partner USG Corp after USG accepted a takeover by German rival Gebr Knauf.

But Boral’s exposure to the US construction market is a big drawcard, in my opinion. That market is growing strongly and its leverage to the rising US dollar mean Boral’s August profit results could excite the market.

The third dog that could be poised for a rebound is also the riskiest one.

I am referring to Telstra Corporation Ltd (ASX: TLS), which is the worst performing blue-chip stock on the market following its 40% fall from grace.

Intense competition and a profit downgrade are souring sentiment towards the company, but this could be the ideal time to start looking at the stock as some of the radical steps announced by management should stem the bleeding and support a dividend of around 16 cents a year.

But buying Telstra now is a bet that management can execute on its strategy, and that requires a bit of a leap of faith. Better start praying!

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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