With the end of the year fast approaching, it’s time to sift through the worst performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index to see if any can be gems of 2019.
The tradition follows the “Dogs of the Dow” theory which is predicated on the belief that the biggest losers on the Dow Jones Industrial Average will outperform the following year as businesses move in cycles – what’s down one year will bounce back the next.
There’s some evidence to suggest that the Dogs of the Dow strategy works as the worst performers on that index have collectively produced gains ahead of the broader market in the year after.
No two dogs are the same
However, the same strategy doesn’t quite translate so well for the ASX 200. For one, there are way too many underachievers on our index in 2018!
We have 61 ASX shares with a market cap of $1 billion or more that have shed 20% or more of their value over the past 12 months.
The worst three performers from this group are all financial stocks with the AMP Limited (ASX: AMP) share price, IOOF Holdings Limited (ASX: IFL) share price and CYBG PLC/IDR UNRESTR (ASX: CYB) share price taking the dubious honour (in that order) with losses of between 45% and 55%.
The Dow only has 30 shares in total and trying to buy all 61 ASX dogs means you will need pretty deep pockets.
The other issue is that the 30 Dow stocks are mega-cap stocks and captains of their industry. The scale and quality of these US-listed companies put them in a different class to what we have on our market.
Dogs to back for 2019
But this doesn’t mean we can’t find bargains among the 2018 market wreckage. I still like UK-bank CYBG although guessing how Brexit will play out is a mug’s game, and that makes the stock a high-risk gamble.
On the other hand, I think the Boral Limited (ASX: BLD) share price looks like a buy after its 39% collapse over the past year as there is too much bad news from the slowing US homebuilding market priced into the shares of the building materials supplier.
The second dog that I like is the Nufarm Limited (ASX: NUF) share price, which has been sold-off 35% no thanks to the drought in parts of Queensland and New South Wales.
There are several positive catalysts that the crop products supplier faces in 2019 including its European expansion and its omega-3 enriched canola seed product.
Finally, integrated energy company Origin Energy Ltd (ASX: ORG) could also be a 2018 dog that comes good after its 35% fall from grace.
The regulatory/political threat against the big energy companies, including Origin Energy and AGL Energy Limited (ASX: AGL), has receded substantially.
Now we only need the oil price to behave.
Motley Fool contributor Brendon Lau owns shares of Boral Limited, CYBG Plc, and Nufarm Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.