In the quest to beat the markets, some contrarian, long-term investors use the strategy of buying the worst performers on the ASX 100 from the last financial year. The thesis behind this strategy is that these companies have a large market capitalisation, pay dividends and can provide capital that may help them recover over time.
Investors look to buy these companies as they have a lower chance of insolvency and stand a chance of outperforming over the next 12 months. Here are some of the worst performing ASX 100 stocks over the past 12 months that could outperform in the 2020 financial year.
Challenger Group Limited (ASX: CGF) – down 41%
The Challenger Group share price was the worst performer on the ASX 100 for FY19, with the company’s share price down 41% for the 12 months. Challenger has faced a difficult trading environment, with lower interest rates and higher costs within the business. Earlier this year Challenger saw interim profits collapse by 97%, with the company citing increased market volatility and industry disruption.
Challenger still expects tough trading conditions over the next 12 months, which could make it hard to see improvements in investment yields, profit margins and annuity sales. On a brighter note, Challenger announced earlier this month that it had advanced its strategic relationship with Japanese MS&AD Insurance Group Holdings. MS&AD currently owns 16% of Challenger and further falls in the company’s share price could make it a prime takeover offer.
Reliance Corporation Worldwide Ltd (ASX: RWC) – down 33%
Earlier this year, plumbing parts company Reliance Worldwide released a trading update and revised its guidance for FY19, downgrading earnings before interest, tax, depreciation and amortisation (EBITDA) from between $280 and $290 million to between $260 and $270 million. Reliance attributed the downgrade to subdued sales volumes due to a lack of modest freeze across the United States (US). As a result, the Reliance share price finished FY19 down over 33%.
Reliance relies on cold conditions to cause traditional plumbing pipes to break, which benefits the sales of the company’s flagship push-to-connect (PTC) plumbing fittings. Despite the weak sales volumes, Reliance has a stable growth profile and holds much of the PTC market share in the US.
Flight Centre Travel Group Ltd (ASX: FLT) – down 32%
The Flight Centre share price finished FY19 down 32%, largely due to lower Australian consumer confidence damaging the appetite for leisure travel. Earlier this year, softer consumer spending saw Flight Centre downgrade its full year profit by around 14% for the full year. The company cited softer transaction values as a result of the challenging trading climate.
A note from analysts at Citigroup implied that Flight Centre could shut down outlets in locations where more than one store exist. Despite reducing total transaction volumes, analysts believe that shutting some outlets could improve margins and lift profits though lower rent and labour costs.
Despite the problems faced by its bricks-and-mortar business model, Flight Centre still has a very strong balance sheet and a history of long-term, sustainable growth. Although Flight Centre reported lower domestic demand earlier this year, the company also expects record profits from its US and United Kingdom businesses, while the corporate travel sector continues to perform strongly. Dividends also make Flight Centre an attractive investment for income.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Reliance Worldwide 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.