One market strategy is known as the “Dogs of the Dow.” By buying the five worst-performing stocks in the Dow 30 at the start of a year, investors have historically outperformed the market.
That’s due to a concept known as “mean reversion.” Simply put, a stock that underperforms in one year is likely to outperform in the next, averaging out to a more typical return. This strategy can work with other beaten-down stocks.
That includes Walgreens Boots Alliance (WBA), which was a poorly-performing stock last year, and even got kicked out of the Dow. However, shares just had their best one-day performance ever, as its recent earnings weren’t as bad as investors thought.
Even after a 28% pop higher, Walgreens still trades at more than a 50% discount to its peak price over the past year. And earnings remain negative, although aggressive cost-cutting is making a difference.
Action to take: Contrarian investors may like shares here, as further improvements could mean bigger returns in the months ahead. Plus, at current prices, Walgreens still pays a 8.5% dividend at current prices.
For traders, a further rally could mean big returns for the June $15 calls. Last trading for about $0.58, the option is inexpensive enough to see high double-digit returns, if not better, on a continued uptrend in the first half of 2025.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.