Every year, the worst performing stocks in the Dow Jones Industrial Average (DJIA) are bestowed the moniker Dogs of the Dow. And to some market observers a decent investment strategy is to pick stocks from the Dogs of the Dow list for the following year with the hope being last year's worst performers will outshine the following year.

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Checking in
Back in December of 2011, I identified the worst performing DJIA stocks as a fun way to follow the Dogs of the Dow Theory in 2012. While the DJIA was up about 4.7% in 2011, that performance was hardly an indication of the representative performance of the constituents within the index. The worst Dow performer in 2011, Bank of America (NYSE:BAC) dropped over 50%, vastly underperforming the overall DJIA. JP Morgan (NYSE:JPM) was another victim of the financial sell-off in 2011 and declined over 20% in 2011. (For related reading, see An Introduction To Stock Market Indexes.)

Thanks to some corporate mishaps, tech bellweather Hewlett Packard (NYSE:HPQ) was the second worst performing DJIA stock dropping some 40% in 2011. After the plunge in shares, many notable investors including value investor Seth Klarman took the opportunity to load up on shares. Industrial aluminum giant Alcoa (NYSE:AA) rounded out the top four list as one of the worst performing Dow stocks in 2011, falling over 40%.

A Strong Start for the Dogs
While it's far too early in 2012 to make any calls, the Dow Dogs are having their day so far. Bank of America is up 20% so far in 2012, as investors seem to think this year may the beginning of the end of a terrible cycle for financials. Last week's earning report confirmed that Bank of America continues to wind down risky assets and improve its capital ratios. Following along the rally in financials, and JP Morgan shares are up over 10% so far. Both names are vastly outperforming the S&P 500 which is up around 3% so far. Even Alcoa is up nearly 10% so far despite an earnings report that was neither encouraging nor discouraging. And with a 2% year-to-date gain, Hewlett Packard gives the Dogs of the Dow Theory a perfect record for these top four underperformers in 2011.

The Bottom Line
It is far too early to claim victory for investing in the Dogs of Dow. At the same time, stocks like Bank of America and Hewlett Packard have been viewed as deep value plays by many investors throughout 2011. While 2012 still has a lot of time left, 2011's Dow Dogs could be 2012's gems. (For related reading, see Barking Up The Dogs Of The Dow Tree.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Tickers in this Article: BAC, HPQ, AA, JPM

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