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Can the ugliest ASX 200 dogs of 2020 turnaround in the New Year?

This is the season many investors will be looking at punting on the worst performing ASX stocks of the year in the belief that most will stage a turnaround in 2021.
The post Can the ugliest ASX 200 dogs of 2020 turnaround in the New Year? appeared first on The Motley Fool Australia. –

2 street signs with winner and loser pointing in different directions ASX dogs

This is the season many investors will be looking at punting on the worst performing ASX stocks of the year in the belief that most will stage a turnaround in 2021.

It’s a tradition made popular by the “Dogs of Dow” theory, although adopting this strategy for the ASX is fraught with danger.

But there is a way to minimise the risk and get this seasonal phenomenon working in your favour.

What drives the Dogs of Dow

Before I get into that, it’s important to know why this strategy can work in the US but not necessarily here.

For those who are unfamiliar with the Dogs of Dow, it’s driven by the belief that businesses work in cycles. So if a stock on the Dow Jones Industrial Average (INDEXDJX: .DJI) slumps in one year, there’s every chance it will turnaround in the new year.

History has shown that this investment method can work most of the time on average, but the theory doesn’t translate so well on the ASX.

Why Dogs of Dow doesn’t work as well for the ASX 200

The most obvious reason is size. The Dow Jones consist of some of the largest companies in the world and have been selected as they shape the US economy. The total market cap of the Dow Jones is US$8.33 trillion ($10.9 trillion).

In contrast, the total market cap of the S&P/ASX 200 Index (Index:^AXJO) is a mere $1.7 trillion.

The other point to note is that the Dow Jones has only 30 stocks. It’s easy to buy all the underperformers. If you tried that with the ASX 200, you will need deep pockets as you will need to buy many more.

You could use the ASX 20, but that’s dominated by banks and mining stocks. There just isn’t quite the same diversification as stocks on the Dow.

Should you still buy 2020 ASX dogs?

But this doesn’t mean you shouldn’t be looking at the dogs of 2020 on the ASX 200. One way this strategy could work for ASX investors is to be far more discerning when picking these laggards.

I’ve screened the biggest stragglers from this year against consensus broker recommendations provided by Thomson Reuters.

Here are a few 2020 dogs on in the top 200 index that brokers are urging you to buy today.

ASX underperformers that brokers are urging you to buy

One stock that stands out is the Downer EDI Limited (ASX: DOW) share price. Shares in the construction services group shed nearly a third of its value this year.

But consensus favours the stock as its leveraged to the booming pipeline of infrastructure construction projects.

Another worth watching is the Nufarm Ltd (ASX: NUF) share price, which lost a quarter of its value in 2020.

Profit misses and droughts have dragged on the seed and fertiliser group over the past year, but the weather outlook is looking bright for 2021.

Further, there are signs that its new omega oil enriched canola seed product is catching on. This innovation is promising to be a medium-term profit driver for Nufarm.

Finally, there’s the Telstra Corporation Ltd (ASX: TLS) share price. The value of our largest telco shrunk by more than 17% in 2020 but most brokers are backing it for 2021.

Its dividend appears to be sustainable, and that’s worth a lot in this zero-rate environment.

While this dividend may be under threat if Telstra tries buying for the NBN, this really isn’t such a bad thing. It’s short-term dividend pain for a longer-term growth lever – if Telstra can get it.

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More reading

Motley Fool contributor Brendon Lau owns shares of Nufarm Limited and Telstra Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Can the ugliest ASX 200 dogs of 2020 turnaround in the New Year? appeared first on The Motley Fool Australia.

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