This is the time when many will be mulling over the question of whether the dogs of FY20 on the S&P/ASX 200 Index (Index:^AXJO) will outperform in the new financial year.
This strategy is popularised by the “Dogs of Dow” theory, which states that last year’s underachievers on the Dow Jones Industrial Average will rebound the following year as businesses move in cycles.
The theory doesn’t quite translate into practice for ASX 200 as there are differences between the Dow and our top 200 benchmark. The most obvious one being the size of companies included in each of the indices.
Value back in vogue
But this doesn’t mean it’s unhelpful to look at FY20 underperformers this year. In fact, this year is probably the best time to be hunting for buys among the laggards compared to past years.
This is because value stocks may finally be pulling ahead of growth stocks for reasons highlighted in my previous article.
This financial year’s underperformers are firmly in the value camp as value stocks trade at a discount to the market and their historical measurements.
On the flipside, growth stocks are those that trade at a premium as investors are happy to bid up shares with better growth prospects in the post COVID-19 world.
Not easy finding the real ASX bargains
But blindly picking ASX stocks from the bargain bin is a recipe for disaster. Some stragglers deserve to be cast aside as their recovery prospects in FY21 don’t look much better than FY20.
What might work as a better filter is to pick the worst performers that are currently rated a “buy” by most brokers covering the stock.
Using consensus data from Thomson Reuters, there are five ASX dogs that stand out.
The worst performer of the group is the South32 Ltd (ASX: S32) share price, which lost around 35% of its value of the past year.
But the majority of brokers think the stock is fundamentally cheap, as do I. I sold out of the base metal miner in August last year but bought back in April when the stock fell under $2 a share.
I think it will head back towards $3 in FY21 as the market thinks the prices for its key commodities are significantly lower than spot prices.
If prices hold around current levels, I suspect we will see a re-rating in the stock.
Zero to hero
Another dog that could find love in the new financial year is the Nine Entertainment Co Holdings Ltd (ASX: NEC) share price.
The media group has long been under pressure due to structural changes in the industry but the coronavirus disruption certainly didn’t help.
The stock slumped around 24% over the past 12 months, but the headwinds are starting to ease.
The reopening of our economy is one obvious plus point, but that isn’t the only light at the end of its tunnel.
The government’s move to force tech giants like Alphabet Inc (aka Google) and Facebook, Inc. to pay local media outlets to reuse content could be a game changer.
Nine also stands to benefit from further easing on cross-media ownership laws and subscriptions for some of its mastheads, like the Australia Financial Review, are stabilising, if not growing.
The other three wooden spooners with a “buy” consensus rating are registry services company Link Administration Holdings Ltd (ASX: LNK), property group Centuria Office REIT (ASX: COF) and health insurer NIB Holdings Limited (ASX: NHF).
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Brendon Lau owns shares of South32 Ltd. Follow me on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (C shares) and Facebook. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Link Administration Holdings Ltd. The Motley Fool Australia has recommended Alphabet (C shares), Facebook, Link Administration Holdings Ltd, NIB Holdings Limited, and Nine Entertainment Co. Holdings 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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