I’ve learned a few things about contrarian investing over the years, sometimes the hard way:
- Investors rarely pick the absolute top or bottom in stocks. Be prepared for short-term losses if you buy a beaten-up stock, or to leave some profit on the table if selling a high-flyer.
- Don’t judge stocks on where they’ve come from, only where they are going. I’ve made that mistake over the years: a $5 stock falls to $1, so looks cheap. Or a $1 stock soars to $10 so seems expensive. Anchoring value to past share prices is a sure-fire way to destroy value.
- Compare like against like. The banks, for example, might look cheap against historic Price Earnings (PE) multiples. But does the sector still demand the same type of PE multiple after the Financial Services Royal Commission and regulatory squeeze?
- Always screen out “market noise” with contrarian ideas. When stocks soar, a chorus of cheerleaders egg them on, hoping for higher prices. When stocks tank, the bears maul undervalued stocks. That creates opportunity for independent thinkers.
- Finally, consider combining fundamental and technical analysis to assess contrarian ideas. The fundamentals are paramount; assessing value matters most. But using charts to identify when fallen stocks have formed a base and are starting to trend higher can be useful.
Using that framework, I have identified three contrarian sell and buy themes for FY20, at the editor’s request. The goal: to provide ideas on sectors and stocks to take profits on, and those that are out of favour, undervalued and worth buying.
Here are 3 contrarian sell themes: