Dead dogs rebound!

March 31, 2021 10:49
Photo: Reuters

Every dog has its days. And therefore there is a popular investment theory of buying underdog blue-chip stocks of previous year because it is quite unlikely they will screw up for the second year in a row.

According to the Dogs of the Dow investment strategy, it’s a good idea to buy up the 10 highest-paying dividend stocks among the 30.

The theory says companies with a high dividend relative to stock price are near the bottom of their business cycle, so their stock price likely would increase faster than companies with low dividend yields.

Apparently, the approach worked well in Hong Kong stock market too over past quarter as investors switched out from new economy plays to traditional plays.

Who would have thought some of the top tech names, including Tencent, Meituan and Xiaomi all reversed courses in the first quarter after capital influx from mainland China sent them to a new high.

The Newton’s law of motion – what goes up must go down – prevails.

Some best performers among the Hang Seng Index constituents last year, such as Wuxi Bio, Xiaomi and Meituan lost ground year to date. All three of them roughly tripled last year, but year to date, Wuxi Bio was down 4 percent, Xiaomi fell about 22 percent, and Meituan was marginally softer.

More amazingly, underdogs like Citic (000267.HK), CNOOC (000883.HK) and China Overseas Land (000688.HK), are all producing stellar returns, registering gains between 15-31 percent year to date on either moderate profit growth or hopes of economic recovery.

Ironically all three are China-related stocks with no technology elements.

It looks easy but it takes a lot of courage for investors to make the switch. At the very least, investors may be ridiculed by peers for buying old economy stocks if they continue to underperform.

Citic was definitely an out-of-favour stock six months ago, otherwise, what can explain why investors ignored a stock with five times price-earnings ratio and seven per cent yield?

As punters found more fun in tech plays, Citic fell to a rock bottom before Christmas. Investors daring to make the move at that time deserve a lot of credit.

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EJ Insight writer