Dogs of the ASX for the 2026 Financial Year

The past twelve months have been quite volatile for investors, with the ASX 200 returning 6%, including dividends. The broader market spent much of the year grappling with higher, stickier inflation, higher funding costs, and a global environment in which central banks became reluctant to declare victory over inflation. March saw a sharp sell-off in global shares after the United States began military operations in Iran, with oil reaching above US$120 a barrel and the ASX 200 dropping 7% over the month.

The gain in the ASX 200 over the past year masks a large dispersion in returns, with miners, consumer staples and energy companies posting strong gains, while technology, healthcare, and telecommunications stocks were weaker. As always at year-end, many investors cast an eye over the market's trash 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! Over the past 12 months, an equal-weighted portfolio of the Dogs from June 2025 would have been the top-performing large-cap Australian Equity Fund by a very large margin, returning 59%, outperforming the ASX 200 by 53%!

In this piece, we will examine the "Dogs of the ASX" in FY 2026, sifting through the market's trash to find treasure, and assess how the 2025 Dogs performed. We will also rate Atlas' picks from 12 months ago.

The theory behind the Dogs of the Dow

Michael O'Higgins popularised a systematic investment strategy of investing in underperforming companies named "Dogs of the Dow" in his 1991 book Beating the Dow. This approach seeks to invest in the same manner as deep value and contrarian investors. O'Higgins advocated buying the ten worst-performing stocks in the Dow Jones Industrial Average (DJIA) over the past 12 months at the beginning of the year but restricting the selection to those still paying dividends. Restricting the investment universe to a large-cap index, such as the DJIA or the ASX Top 100, improves the unloved company's chances of recovery in the following year.

Larger companies are more likely to have the financial strength and assets to sell, as well as an understanding of capital providers (such as existing shareholders and banks) who can provide additional capital to help the company recover from corporate missteps or adverse economic conditions.

A smaller company is more likely to have its debt held by domestic banks in short-dated facilities, with local banks being more likely to move quickly to recover a doubtful debt and put the company into liquidation. Something that doesn’t give equity holders much runway to respond to adverse economic conditions.

Retail investors have an advantage

One reason 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 portfolios towards the end of the year as part of "window dressing" before the portfolio is evaluated. Institutional fund managers' selling of underperformers is especially prevalent in December and June of every year.

This time last year, a fund manager would have seen some pretty stern questioning from asset consultants and clients about why they owned any lithium company in the current environment, with all companies losing money and the lithium price expected to be in the doldrums for many years. This is something Atlas experienced first-hand due to our position in Mineral Resources.

Retail investors can afford to take a longer-term view on the investment merits of any company that may have hit a speed bump, as they are not swayed by asset consultants questioning short-term underperformance. Additionally, many underperformers see tax-loss selling around the end of the financial year, further depressing share prices in June. Often, the share prices of these underperformers rebound in the new financial year as this tax-loss selling ends and investors repurchase their shares. This is likely to be a bigger factor in 2026, given the changes to how capital gains tax will be implemented on investments.

Dogs of the ASX in 2026

Over the past year, the Dogs from 2025 gained by 59% and significantly outperformed the ASX 200, marking the second-highest outperformance of the Dogs Portfolio since Atlas began analysing the series in 2011, trailing only the cohort from 2016, which returned a stellar +74%.

From the table above, seven of the ten "dogs" of 2025 outperformed the index; a larger number than the usual three to four companies that shine bright, which dragged up the return for the year.

The pain for lithium miners, including Pilbara Minerals, IGO, and Mineral Resources, has subsided following a 156% recovery in the lithium price. Similarly, other commodity producers, Fortescue and Whitehaven Coal, benefited from a recovery in iron ore and coal pricing.

The pain continued in FY26 for former high-flyers and favoured "growth" stocks, including Treasury Wine and IDP Education. Treasury Wine has another soft year, announcing it will suspend dividends to try to reduce its high debt load, while also facing a drop in consumer demand in both the United States and China.

IDP Education had another tough year, with its share price now down 94% from its 2021 peak. International university preparation faced continued pressure from governments worldwide to limit immigration. This has weighed on international student placements and associated English-language testing volumes.

Our picks from July 2025??

When making our picks twelve months ago as to which of the Dogs from FY 2025 would rebound over the coming year, Atlas' class mark would be an A-, one of our better efforts.

Atlas remained cautious towards IDP Education, as we had no visibility into whether government policies on student visas would loosen, which could lead to higher acceptance rates for international students. Similarly, Atlas did not select Treasury Wine’s to recover, given the higher level of leverage and inventory the business had accumulated following the acquisition of DAOU Vineyards in the United States.

In July 2025, Atlas picked Mineral Resources (+188%) and Whitehaven (+42%) to stage recoveries in FY2026. Both companies benefited from a recovery in commodity prices, aided by a rebound in lithium and coal prices, as well as positive company moves such as Mineral Resources fixing its troubled iron ore access road. Although not the two best-performing stocks, both companies ended the year with returns above the index.

What does the class of 2026 look like?

Looking through the list of 2026 underperformers, there is only one old face from last year, Treasury Wine Estate, with many companies making their first appearance on the list. Indeed, this year's Dogs looks like a list of the top ten blue-chip holdings from a few years ago for any Australian equity growth manager.

The key themes in the list of Dogs for the financial year 2026 are:

1. AI Fears – Wisetech, Xero, Seek, REA, Pro Medicus, Car Group

2. Weaker Volumes and Sales Growth – Cochlear, CSL, Treasury Wines

3. Adverse Government Regulation – Telix Pharmaceutical

Our Picks for 2027

In almost every year, several companies in the Dogs of the ASX list will significantly outperform the market over the following year. As we saw over the last 12 months, recency bias in our caveman brains leads most investors to place too much emphasis on recent negative news and extrapolate it into the future. This creates an investment case that the current negative market conditions or poor management decisions will continue indefinitely.

Atlas's picks for a recovery in the next 12 months are CSL and Xero. CSL has had a very tough twelve months, overestimating demand for key products, revealing cost blowouts, and experiencing a slow recovery in plasma collection, all of which culminated in their CEO retiring the day before they released their results in February. CSL’s share price is currently at the same level as in 2016, yet it has added US$1.9 billion in net profit, a 150% increase. Key near-term catalysts for CSL will be the announcement of a new CEO, a recovery in plasma margins, and achieving profit guidance in 2027, thus improving management credibility.

Over the past year, accounting software company Xero didn’t make many significant missteps, but rather saw its margin decline due to the integration of Melio, as well as general concerns that AI would displace the Software-as-a-Service (SaaS) model. While some software companies face this risk, Xero’s accounting software is likely to benefit from integrating AI and has high switching costs. While the cost of Xero’s financial operations software is typically small, the risks of AI-generated software making a mistake in invoicing, payroll, compliance and tax are high.