Why 2024's Market Winners Should Be the Focus for Investors

Highlights: 

• MST Marquee recommends sticking to top-performing stocks rather than chasing underperformers in 2024. 
• The “dogs of the Dow” strategy, once popular, faces challenges in the current market environment. 
• Some fund managers remain optimistic about selecting undervalued stocks with growth potential. 

The 2024 investment landscape presents significant opportunities for investors, particularly those focused on following the winners from the previous year. MST Marquee, a broker known for its research, advises investors to avoid the temptation of betting on the underperformers, stressing that the best-performing stocks often continue their momentum into the new year. This approach stands in contrast to the well-known “dogs of the Dow” strategy, which involves buying the worst-performing stocks in hopes they will rebound. In this current market, however, such a strategy may not yield the best returns. 

MST Marquee’s senior research analyst, Hasan Tevfik, encourages investors to "resist the temptation of being a hero" and instead follow a strategy of buying the top-performing stocks in the ASX 200. According to MST’s analysis, buying the best-performing decile of stocks and selling the worst-performing ones has proven to be a consistently successful strategy since 2000. This approach has delivered average annual returns of around 16%, highlighting the advantage of focusing on companies that have demonstrated resilience and strong performance. 

In particular, the past year’s winners—such as Pro Medicus (ASX:PME), REA Group (ASX:REA), Xero (ASX:XRO), and Life360 (ASX:360)—have not only maintained their upward trajectory into 2024 but have also experienced continued growth. These stocks have provided robust returns, and the positive momentum they carry into the new year positions them well for further success. Conversely, the biggest losers of 2023, including stocks like Core Lithium (ASX:CXO), Star Entertainment (ASX:SGR), and Ramsay Health Care (ASX:RHC), have struggled to recover, with continued losses in 2024. 

While MST Marquee's analysis shows that momentum investing—buying stocks that are already rising—can be a successful strategy, it also notes that it may face challenges as the market approaches a turning point. With valuations climbing, global central banks tightening policies, and inflationary pressures mounting, the risk of a market correction is growing. Should a turning point occur, last year’s winners may encounter headwinds, as the broader economic environment may shift in ways that impact their performance. 

Despite these concerns, some investors are still searching for hidden opportunities in the market’s underperforming stocks. Boutique fund manager Atlas Funds Management, led by Chief Investment Officer Hugh Dive, remains open to the idea of identifying undervalued companies poised for a turnaround. Dive suggests that focusing on large-cap stocks, particularly those in the ASX 100, increases the chances of success. He notes that a company's ability to pay dividends is a strong indicator of its financial health and resilience, which can provide the necessary support during periods of market stress. 

Atlas Funds Management has had mixed results with the “dogs of the Dow” strategy, with some successes, such as the rebound of Incitec Pivot (ASX:IPL), but also some misses, such as Alumina (ASX:AWC) and AMP (ASX:AMP). Dive believes that at least three companies from the bottom 10 of the ASX 100 each year can experience dramatic recoveries, provided their challenges are company-specific and not driven by broader market factors like commodity price fluctuations or changes in government policy. 

One company that Atlas is watching closely is Mineral Resources (ASX:MIN). After a tough 2024, which saw CEO Chris Ellison embroiled in an offshore tax scheme and an internal investigation, the company is expected to recover in the coming year. Despite the challenges, Mineral Resources remains an intriguing option for investors who believe in its long-term growth prospects. However, Atlas is less optimistic about Ramsay Health Care’s (ASX:RHC) recovery. The company faces significant pressure from rising labor costs, especially in nursing, heavy debt burdens, and challenging negotiations with private health insurers. 

In conclusion, the current market dynamics suggest that investors who focus on the winners from 2023 may be better positioned to achieve positive returns in 2024. While the “dogs of the Dow” strategy holds appeal for some, the risks associated with betting on underperforming stocks are significant in a market that is approaching a turning point. For those seeking more stability, sticking with the proven champions of the market—such as Pro Medicus (ASX:PME), REA Group (ASX:REA), and Xero (ASX:XRO)—may offer more reliable growth potential, particularly in a year that may bring increased market volatility.