There is a famous investment theory called "Dogs of the Dow" from a 1991 book titled Beating The Dow.
This system advocates buying up the worst-performing stocks from the past calendar year, with the contrarian belief that they must be due for a recovery over the next 12 months.
Atlas Funds Management chief investment officer Hugh Dive said there's a reason why this approach works.
"Institutional fund managers often report their portfolios' contents to asset consultants as part of their annual reviews," he posted on Livewire.
"This process incentivises fund managers to sell the 'dogs' in their portfolio towards the end of the year as part of 'window dressing' their portfolio before being evaluated."
Because of this, retail investors actually have an advantage over the professionals.
"Their lack of scrutiny from asset consultants allows them the flexibility to pick up companies whose share prices have been under pressure late in the year that could see a rebound when the selling pressure stops in January and February.
"Furthermore, retail investors can afford to take a longer-term view on the investment merits of a particular company that may have hit a speed bump."
Refining the philosophy further, Dive has picked out 2 particular ASX shares among 2021's 'dogs of the ASX' that have the best rebound potential.
One takeover candidate and coal comeback
Construction company Lendlease Group (ASX: LLC) and explosives provider Orica Ltd (ASX: ORI) saw their shares plunge 16% and 8% respectively in 2021. And they've each fallen a further 3% or so in the first few days of this year.
Dive is picking these two businesses to see a strong revival in 2022.
He loves the takeover potential of LendLease with "an attractive $110 billion global development pipeline".
"It currently trades on a cheap multiple," Dive said.
"Additionally, LendLease is a more palatable and cleaner acquisition target since exiting its volatile engineering business."
The fall in Orica shares was triggered by a collapse of thermal coal volumes from its mining clients.
"However, in 2022 the outlook for coal looks robust, particularly in light of major exporter Indonesia banning coal exports in January 2022," said Dive.
"This move by the Indonesian government is being made to divert coal to domestic power producers and will be beneficial for Australian coal miners — and hence Orica."
