But every dog has its day and buying the 10 worst performers at the end of September - judged on their previous three year performance - has paid hefty returns in the past. In fact, if you had followed our trading strategy you would have turned in an average three-month gain of 16.3 per cent between 1997 and 2013. That is over 11 percentage points more than an S&P 500 index tracker.
True to form, our US dog stocks surged by 10 per cent in the final quarter last year ('Easy as pie', 27 Sep 2013). But it pays to bank these short-term gains. That's because the technical factors driving the outperformance have a habit of unwinding in the new year as was the case this year. For example, a major factor making these laggards so undervalued and ripe for a major bounce back at the end of September is window dressing by fund managers at the end of the US fiscal year. Risk also plays a major part because stocks that have fallen so much in the past carry much more distress and liquidity risk than the average constituent of the index. They are more volatile, too. Market risk is also important because these laggards have a high sensitivity to market moves, something worth capitalising on as the final quarter is the best-performing period of the year. But this works both ways as the hefty fall in the S&P 500, and spike in equity market volatility in January this year, wiped out those bumper gains in our risky dog stocks.
So if you can stomach the risk, the 10 S&P 500 dog stocks to buy now and hold to the end of December are: Newmont Mining (US: NEM), Peabody Energy (US: BTU), Avon Products (US: AVP), Diamond Offshore Drilling (US: DO), Coach (US: COH), Transocean (US: RIG), FirstEnergy (US: FE), Exelon (US: EXC), Teradata (US: TDC) and Joy Global (US: JOY). Our chosen trading strategy is to buy all 10 shares and run them as a portfolio through a spread bet to avoid currency risk and to minimise transaction costs.
For the full online version of this article, including methodology and more detail on previous year's performance, click here.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
