Buy Hold Sell: 3 dogs of the ASX 100 (and 2 in for a rebound)

In 1991, Florida-based portfolio manager Michael B. O'Higgins released his book "Beating the Dow". In it, he proposed a strategy whereby with as little as $5000, investors could beat the pros 95% of the time by investing in the 10 high-yield blue-chip "dogs" of the Dow Jones Industrial Average (DJIA). 

Inspired by O'Higgins' work, Atlas Funds Management's Hugh Dive runs his very own version of this strategy, building a portfolio of the 10 worst-performing ASX-listed large caps at the start of the new financial year and tracking their progress. 

The strike rate, surprisingly, is quite good - with the 10 "dogs" beating the benchmark in seven out of the last 10 years. 

So in this episode, Livewire's Ally Selby was joined by Dive and IML's Hugh Giddy for their analysis of three of the worst-performing blue-chip stocks over the past 12 months. 

Plus, they each name one beaten-down stock that they believe is the best contender for a rebound over the year ahead. 

Note: This video was filmed on Wednesday 20th July, 2022. You can watch the video, listen to the podcast, or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire’s Buy Hold Sell. I'm Ally Selby, and they say the lower the price you pay, the better your returns in the future. So today, we're going to take a look at some of the dogs of the ASX 100 to see if you should be snapping up any bargains right now. 

And while last fortnight we had our first-ever all-female panel of Buy Hold Sell, this week we have another first. Today we are joined by two Hughs. Hugh squared if you will - Hugh Dive from Atlas Funds Management and Hugh Giddy from IML. 

First up today, we have Evolution Mining. It's down 43% over the past year. Hugh, I might start on you. Is it a buy, hold, or sell?

Evolution Mining (ASX: EVN)

Hugh Dive (BUY): It's a buy, but a very soft buy, Ally. It's been a tough year with a range of downgrades, including a fund management downgrade on the 30th of June, which would've been very unpleasant for those that owned it - having to write stock reports. But Evolution's production issues are not insurmountable. The gold price could go up, and if they get their production back together, its (share price will) go up.

Ally Selby: It's had a really tough time, its share price is back trading down where it was around five years ago. Hugh, over to you. Is it a buy, hold, or sell?

Hugh Giddy (HOLD): It's a hold for me. I don't cover it closely. Obviously, it does depend on production and so forth. However, a lot of these mining companies do have production issues, but in the end, it's going to depend on the gold price. That's been beaten down a bit. Sentiment on gold's a bit weak. So that's why I don't have it as a sell because all the commodities are going down, and gold is a little bit out of favour, so I'd say it's a hold.

Block Inc (ASX: SQ2)

Ally Selby: Next up we have Block, formerly Square. It acquired Afterpay for a whopping $39 billion last year. Talk about buying at the peak. Hugh, is it a buy, hold, or sell?

Hugh Giddy (SELL): I still have that as a sell. I don't think there's much of a franchise in buy now, pay later. Block's more than that, but I just wouldn't go near a lot of those technology companies, the valuations are still too high.

Ally Selby: Since Block hit the ASX, its share price has actually fallen around 43%. Hugh, over to you. Is it a buy, hold, or sell?

Hugh Dive (SELL): Totally agree with Hugh. The next year's going to be very unpleasant. Rising interest rates are not going to see high P/E companies like Square move up from 70 to 150 times. There's going to be a lot of negative sentiment, and bad debts are only going to increase. We saw the half-year bad debts are up by $100 million. I don't know what they will be coming up, but it's hard to pick that it's going to be a strong rebound candidate. This is a strong sell.

Domino's (ASX: DMP)

Ally Selby: Last of the dogs today is Domino's. Its share price has fallen around 38% over the past 12 months - it's probably all my fault, I haven't ordered a pizza from them for a long time. Hugh, staying with you. Is it a buy, hold, or sell?

Hugh Dive (BUY): Well, given I picked it as a buy in an article I wrote for you three weeks ago, I still have to pick it as a buy. I think in an environment of rising interest rates and rising mortgage payments, people are going to stop going out to restaurants, and stop buying fancy wine, and buy three pizzas, a lava cake, and garlic bread for $29.95 from Domino's instead. 

Ally Selby: Bargain!

Hugh Dive (BUY): It's going to look like a cheap luxury. I think the following 12 months look a lot rosier for Domino's, but we don't own it in the portfolio.

Ally Selby: Over to you, Hugh. Do you like Domino's pizzas? Is it a buy, hold, or sell?

Hugh Giddy (HOLD): It's a hold for me. Look, it's down a lot. I can't do the Jerry Harvey thing on how much you can get for $29.95 because I don't actually buy pizza from there. I'm too health conscious, and people less vain than myself about their waistline do go and get Domino's pizza. I know that it's a good seller, and it is down a lot, and they've got a very strong franchise. But I do think that the health concern is a very real thing. People need to eat more healthily, and COVID should have taught them that.

Mirvac Group (ASX: MGR)

Ally Selby: Okay. We asked our fundies to bring along one beaten-down stock that they think is in for a rebound. Hugh, what have you brought for us today?

Hugh Giddy (BUY): Well, full disclosure, this is a buy, but we are not saying that we have bought it yet. But I do think what's interesting in large caps is Mirvac. I did have a different candidate when you asked me on the panel, but it's gone up, so I'm picking Mirvac. Most of the value is in the company's office portfolio. And they are also known for their residential development, but I think that's going to be a little bit trickier, given we have had a bit of a housing boom. It's on a 5% yield. The NTA is going to come down because offices are valued too highly. And as interest rates go up, that NTA will fall. But the share price has already taken that into account. So I think there might be an opportunity for people here.

Ally Selby: Can you tell us what the other stock is that has already rebounded?

Hugh Giddy (Buy): Medibank Private

Domino's (ASX: DMP)

Ally Selby: Over to you Hugh. What's your fallen angel that you think is in for a rebound?

Hugh Dive (BUY): Given I wrote this article a couple of weeks ago, I've still got to stick with Domino's pizza. There's been no changes in the last three weeks. Bit of a caveat, similar to Hugh, we don't own Domino's. Similarly again, I don't eat their pizza. For different reasons to Hugh, not for the waistline, but more personal taste. But I think that they'll be well placed to do quite well. Other fallen angels in there, like Reece (ASX: REH), I think they'll struggle. They're a high-quality company, but there's going to be very few $30,000-$40,000 bathroom remodels over the next year. I think you should stick with the cheap pizza.

Ally Selby: Ok, that's all we have time for. I hope you enjoyed that episode on the dogs of the ASX 100. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.

Let us know what you think

A lot of stocks have been heavily sold off since the start of the year. So which do you believe are in for a rebound over the months ahead? Let us know in the comments section which "dogs" of the ASX could see a reversal in the coming months. 

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