2011's Dogs Of The Dow : AA, BAC, HPQ, JPM

The Dogs of the Dow is the name bestowed on the worst performing stocks in the Dow Jones Industrial Average on any given year. The category came about as a trading strategy; buying the worst performing stocks in the hopes that a new year leads to a turnaround and market outperformance.


The Fallen Four
It will come as no surprise to many that this year's worst performing Dow Jones member is Bank of America (NYSE:BAC) who shares have fallen some 60% in 2011. Thanks to a financial crisis in Europe and continued fears over the litigation that hangs over the company's mortgages, investors have dumped shares en masse. Number two on the list is aluminum giant Alcoa (NYSE:AA), down over 40% in 2011. Shares now trade for around $9 valuing the business at less than 10 times earnings and about 63% of book value. (For related reading, see The 4 Basic Elements Of Stock Value.)

Filling up the next two slots for worst performing DJIA stocks in 2011 are tech giant Hewlett Packard (NYSE:HPQ) and investment bank JP Morgan (NYSE:JPM). HP's mishaps have been headline grabbers all year. First it was the ouster of CEO Mark Hurd, followed by a new CEO who was quickly fired for committing more than one strategic blunder. The result was a 40% drop in the stock. JP Morgan, part of the overall financial sell off, is down over 20% in 2011.

Will the Strategy Work?
While buying an asset simply because it has fallen in price over a 365-day period is no sound strategy, buying a quality asset because the price is below intrinsic value can be. It just so happens that Bank of America is a big holding for value investor Bruce Berkowitz. The bet has yet to work out, but Berkowitz is a patient man and previously made a small fortune by betting on financials in the 1990s. Hewlett Packard was a big buy for value investor Seth Klarman in the third quarter of 2011. Klarman's $465 million HP stake makes HP Baupost's second-largest position, suggesting that Klarman sees great upside potential for HP.

The Bottom Line
Whether or not you subscribe to the Dogs of the Dow theory, it's not often that names on the list turn out to be huge investments for some savvy investors. But it turns out that going in 2012, the strategy may work out better than most expect.