Five cheap contrarian shares

The cheapest five shares we identified last year managed an average total return of 28 per cent, while the full 20-stock portfolio returned 8.4 per cent. The total return from the FTSE All Share index over the same period was modestly negative (see table).

How last year's contrarain 20 performed

source: Datastream

Ken Fisher believed that while earnings were cyclical and easily manipulated, sales provided the ultimate guide to a company's ability to grow. The market might punish an earnings miss, but if sales reliably move in the right direction, then a company can usually bring its earnings back into line over time. The share price decline associated with the earnings miss becomes an opportunity.

Our table of 20 stocks is based on the 20 cheapest companies on an enterprise-value-to-sales basis that passed all six tests. The stocks are high risk and as our table of last year’s portfolio performance shows, returns can be very bad as well as very good. We take a closer look at the cheapest five below.

This year's contrarian shares

Source: S&P CapitalIQ

FIVE CHEAP CONTRARIAN SHARES

Clarkson

A slump in world trade coinciding with a glut of new capacity - this shipping broker is certainly a contrarian investment. But Clarkson has cut costs and got out of unprofitable businesses. The very attractive yield is underpinned by a big cash pile. And when trade does eventually pick up, Clarkson's high operational gearing should mean profits - and the share price - recover quickly.

Source: S&P CapitalIQ

Last IC view: Buy, 1,334p, 8 Mar 2012

CSR

Long regarded as an also-ran among chip-makers, CSR is enjoying a re-rating. The shares have already rallied strongly to get back to the price of a year ago and there is good reason to hope for more to come. The recent sale of its handset business to Samsung for $310m (£199m) was transformational - removing a big risk to profits and allowing it to concentrate on five core markets where it is a clear leader. Broker Peel Hunt expects average compound annual growth of 14 per cent from these markets. There's also the prospect of a $285m tender offer following the Samsung deal.

Last IC view: Buy, 293p, 16 Jul 2012

GVC Holdings

Online gambling group GVC was a big contributor in last year's portfolio, boasting a total return of 53 per cent, and it's also one of the cheapest five stocks this year. Its managers are heavily incentivised to pay out 75 per cent of operating cash flow as dividends, and that policy results in a whopping 11 per cent yield. The main risk is regulatory - online gaming is prone to sudden and substantial changes in legislation and taxation.

Last IC view: Buy, 149p, 27 Apr 2012

YouGov

YouGov is increasingly viewed as a growth stock thanks to its presence in digital media. The company's first-half results showed progress across the board, including the Middle East business. Germany has also begun to grow again and the group continues to make impressive inroads into the US, now its biggest market. While sales growth has been impressive, there is plenty of room for improvement in profitability - Broker Panmure thinks YouGov can boost operating margins from a current 9 per cent. Peel Hunt expects a maiden interim dividend this year of 0.8p.

Last IC view: Hold, 68p, 3 Apr 3012

Murgitroyd

Shares in patent attorney Murgitroyd seem forever cheap - it was in last year's screen as well, contributing a 10 per cent total return. Based on the strong trading reported in its full-year update earlier this month, the stock could well repeat the trick over the coming 12 months. Risks include the economic outlook and the lack of visibility over future earnings.

Last IC view: Buy, 345p, 31 Jan 2012