Traditionally, investors are taught that to beat the market you should buy well-loved stocks with share prices that have outperformed. Although this may be a tried and tested method, there are other investment strategies that could help you beat the market in 2020.
One such method is a contrarian strategy called ‘Dogs of the Dow’, which involves investing in underperforming companies. The strategy was popularised by Michael O’Higgins in his book Beating the Dow and involved buying the 10 worst-performing stocks over the past 12 months on the Dow Jones Industrial Average.
The rationale behind this strategy is that these companies have a lower chance of insolvency. This is because they have a large market capitalisation, pay dividends and can provide the capital that may help them recover over time.
To follow that rationale, here are some of the worst performing ASX 100 stocks from the past 12 months that could help you beat the market in 2020.
Cimic Group Ltd (ASX: CIM) – down 23%
The Cimic share price was trashed in 2019 after the engineering and construction company reported a miss on its interim net profit. The company reported an interim net profit of $367 million that was nearly 10% below market expectations.
Construction accounts for 44% of Cimic’s business operations and the sector experienced a 15% drop in profit, despite the company being awarded new contracts. A shift from fixed-price construction contracts was partially to blame.
On the bright side, if the Cimic share price continues to flounder the construction company could be a prime takeover target.
Challenger Ltd (ASX: CGF) – down 11%
The Challenger Group share price struggled in 2019 as the company 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.
More positively, Challenger announced earlier last year that it had advanced its strategic relationship with Japanese company 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 Worldwide Corporation Ltd (ASX: RWC) – down 8%
Reliance is the world’s largest manufacturer of push to connect (PTC) plumbing fittings and water control valves. The company’s flagship product ‘SharkBite’ has been embraced by plumbers who prefer the PTC technology over soldering traditional brass fittings.
Despite closing 2018 at all-time highs, the Reliance share price struggled in 2019 and was down more than 28% at one point last year. Reliance Worldwide released a trading update early last year revising its guidance for FY19. The company downgraded earnings before interest, tax, depreciation and amortisation from between $280 and $290 million to between $260 and $270 million.
Reliance cited subdued sales volumes in the US, trade tensions and the high cost of raw materials as contributing factors. In addition, the $1.2 billion acquisition of John Guest Holdings exposed Reliance to volatility in the British economy given the economic uncertainty of Brexit.
With the ASX finishing 2019 more than 25% higher, some companies could be looking fully valued. This provides an opportunity for long-term investors to search for stocks that have been oversold and have the foundations to bounce back. As always, a good strategy would be to keep these underperforming stocks on a watchlist and wait for positive price action before making an investment decision.
5 stocks under $5
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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. 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.
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