Dogs of the Dow
Michael O'Higgins popularised a systematic strategy of investing in underperforming companies named "Dogs of the Dow" in his 1991 book "Beating the Dow." This approach draws on the same investment principles as deep value and contrarian investors. O'Higgins advocated buying the ten worst-performing stocks over the past 12 months from the Dow Jones Industrial Average (DJIA) at the beginning of the year but restricting the stocks selected to those still paying dividends.
Restricting the investment universe to a large capitalisation index like the DJIA or ASX 100 improves the chance that the unloved company may have the financial strength or understanding of capital providers (such as existing shareholders and banks) that can provide additional capital to allow the company to recover over time.
The thought process behind requiring a company to pay a dividend is that its business model is unlikely to be permanently broken if it still pays a distribution. A company's directors are unlikely to authorise a dividend if insolvency is imminent.
The strategy then holds these ten stocks over the calendar year and sells them at the end of December. The process then restarts, buying the ten worst performers from the year that has just finished.
Retail investors have an advantage.
One of the reasons this strategy persists is that institutional fund managers often report the contents of their portfolios to asset consultants as part of their annual reviews. 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.
For example, in early 2024, fund managers with ResMed or AMP in their portfolios would have faced stern questioning from asset consultants about why they owned these companies with bleak outlooks for the coming year.
ResMed was facing a new form of competition with GLP-1 and weight loss drugs, with Novo Nordisk Ozempic and Eli Lily's new Mounjaro drug shortly to hit the market. These drugs promised to create a thinner population that required fewer sleep apnea machines. Similarly, AMP was facing more challenging times with costs continuing to rise across the business and how they would execute the launch of their digital bank. However, in 2024, it became clear that consumers were still going to require RedMed's (+45%) sleep apnoea machines, and AMP (+75%) could execute selling parts of the business, rewarding shareholders that were brave enough to add them to their portfolios in January 2024.
Here, retail investors can have an advantage over institutional investors. 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 December. Furthermore, retail investors can afford to take a longer-term view of the investment merits of a particular company that may have hit a speed bump.
The Dogs
The list of the Dogs of the ASX from 2024 is quite similar to the Dogs from 2023 in that it contains several generally considered high quality and would feature prominently in the portfolios of many growth-style fund managers such as Ramsay Healthcare, Fortescue and NIB. Additionally, some companies have previously been featured on the Dogs of the ASX 100, such as Iluka Resources and IGO Limited.
The three key themes common to the companies whose share prices struggled in 2024 are:
- Falling Commodity Prices: Mineral Resources, Pilbara Minerals, IGO Limited, Fortescue, Iluka Resources and Paladin Energy.
- Lower margins across offerings: Viva Energy, Ramsay and NIB
- Tighter Regulation: Ramsay Healthcare and IDP Education4
Our picks for 2025
After analysing the Dogs of the ASX 100 each year since 2010, at least three companies from the bottom ten will stage dramatic turnarounds in 2025. However, sitting here in January, picking the candidates for share price rebounds is always very challenging due to recency bias from the previous 12 months of bad news about these stocks.
In selecting a share price recovery candidate for the next year, we generally look at companies whose current woes are company-specific rather than caused by factors outside the control of their management team, such as commodity prices or government policies.
Atlas sees that
Mineral Resources will have an annus mirabilis in 2025 after an annus horribilis in 2024, which saw the company's share price battered by falling lithium prices and poor choices by founder Chris Ellison, which led to governance questions. Whilst Mineral Resources CEO is in the naughty corner, he's done some good things for shareholders over the past year, selling the haulage road to Onslow for $1.3 billion to Morgan Stanley and selling onshore gas assets to Hancock Prospecting for $1.1 billion. These actions have lightened Mineral Resources' debt load, and we have seen lithium prices recover 10% from their lows.
Conversely, seeing
Ramsay Healthcare stage a remarkable recovery in 2025 is harder. The hospital operator is facing rising labour costs from their nursing staff, a heavy debt load, and tough negotiations with private health insurers, some of which, such as Medibank Private, have been investing in in-home patient care. Recovering from procedures at home is popular with the patients and very popular with shareholders, but deprives Ramsay of between $2,00 and $6,000 charged per day to recover in private hospitals. It's not a great situation for a company trading on 30 times earnings with slender profit margins.
Searching through the market's trash for some treasure in 2025