Dogs of the ASX: did they bark or bite in 2024?

The last 12 months have been another surprisingly good year for equity investors, with the ASX 200 up +7.5% or 11.4%, including dividends, a similar outcome to what we saw in 2023.

However, as always, equity investors never receive the smooth returns that term deposits offer, though in 2024, investors in Australian equities generally received an additional 7.4% over term deposits (approximately 4%) - a sufficient return premium to compensate for the odd anxious moment. April saw global markets fall on global inflation resurgence, and August was a wild month that saw a fall of -6% at the start of the month when Japan increased interest rates for the first time since 2007. Thankfully, the ASX recovered to finish unchanged on stronger-than-expected corporate profits during the August reporting season, a bruising month that looked pretty benign after all.

Like many, Atlas had a very cautious outlook for 2024 when writing this Dogs piece in January 2024. The Reserve Bank of Australia had raised the interest rate 13 times since May 2022, and inflation was still above 4%. Due to this, many predicted that house prices would come down or consumers would have to move to service their mortgages. Despite this pessimistic outlook for the 2024 year ahead, global and Australian markets had a solid year, with banks (+33%) and consumer discretionary sectors (+23%) performing ahead of the market.

As always, at this time of the year, investors will pick through the market's trash of 2024 to find some treasure to drive portfolio returns over the coming year. Invariably, several bottom-performing stocks will confound market expectations and stage remarkable comebacks, as we saw in 2023. Although the "dogs" collectively did not beat the market, four names that looked infested with fleas 12 months ago returned over 35% for 2024.

In this first weekly piece of the year, we will look at the "dogs" of the ASX from 2024, see how 2023 Dogs performed and mark Atlas' predictions made 12 months ago in January 2024 Dogs of the ASX.

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 of 2023 Matched the ASX 200 in 2024

Over the past year, the average equal-weighted return of Dogs from 2023 was a solid +11%, effectively matching the ASX 200. This marks the fourth time since 2014 that the dogs underperformed the ASX over a calendar year. Over the past decade, the Dogs have only underperformed the ASX 200 three times, which is a pretty solid record! Solid gains from Alumina, A2 Milk, AMP, and ResMed more than offset weaknesses in IGO, IDP Education and Ramsay Healthcare.

Alumina had a solid 2024 after being taken over by its long-term joint venture partner, Alcoa, 30 years after the joint venture was established with then-owner Western Mining Corporation. AMP won the prize for the best dog in 2024, selling business units, buying back stock and jumping over some very low hurdles. It will be interesting to see what 2025 holds for the increasingly diminutive financial services company AMP, which has the most appearances on the annual Dogs of the ASX, appearing four times over the past decade.

Predictions from January 2024

When we went through this exercise twelve months ago, Atlas correctly picked that Incitec Pivot (+22%) would have a brighter 2024. After selling the company's Waggaman Ammonia Plant in Louisiana in 2024, the company conducted a $500 million tax-effective capital return and steadily bought back shares on the market over the course of 2024. Combined with solid operational performance from explosives and fertilizers, Incitec Pivot's shareholders had a more enjoyable 2024.

Less successful was Atlas' dismissing the chances of Alumina and AMP to rebound in 2024. As discussed above, few would have expected that US-listed Alcoa would finally clean up their corporate structure after 30 years by taking over Alumina. Similarly, AMP's stellar performance in 2024 surprised all but one deep deep value Australian Equity fund manager. As discussed in Buy Hold Sell: 3 nice stocks and 2 on the naughty list for 2025,  Atlas is not unhappy about missing AMP in 2024, as we see there is still scope for the company to return to the naughty list in 2025.

In our Dogs piece last January, we discussed picking ResMed (45%), but ultimately demurred due to a lack of confidence around the impact GLP-1 weight loss drugs such as Ozempic on sleep apnoea and the upcoming re-entry of competitor Philips into the market. This proved to be an error, with sales growth of their medical devices increasing throughout 2024.

Unloved mutts from 2024 in need of a good home in 2025

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:

1. Falling Commodity Prices: Mineral Resources, Pilbara Minerals, IGO Limited, Fortescue, Iluka Resources and Paladin Energy.
2. Lower margins across offerings: Viva Energy, Ramsay and NIB
3. Tighter Regulation: Ramsay Healthcare and IDP Education

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.