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Five contrarian value plays

Big rewards are on offer for contrarian investors, but only if they're prepared to take on big risks
July 24, 2019

Contrarians can make huge profits on shares, but only by taking on huge risks. The performance of the top five picks from last year’s Ken Fisher-inspired Contrarian Value screen illustrates this dynamic: 12-month total returns ranged from a knockout 77 per cent to a head-in-hands negative 40 per cent. Overall, the five stocks delivered an average 6.4 per cent total return, which was a bit better than the 2.2 per cent from the FTSE All-Share.

Upsets are to be expected from contrarian investments. After all, contrarians make money by buying shares that hardly anyone else will touch. The hope is that so much bad news has been priced in that the only way is up. If a contrarian investment goes well, the brave investor gets the heady combination of a sharp recovery in earnings and an upward rerating of the share price as a multiple of those earnings. But often with bashed-up shares, the only way for shareholders is actually down. This has been demonstrated by recent high-profile stock market disasters, such as Carillion and Debenhams.  

While my Contrarian Value screen is pretty much guaranteed to pick some howlers, it does use a number of tests to try to reduce the danger of ploughing headlong into value traps. Broadly, these tests involve looking for companies that have been reasonably profitable historically, are not too financially stretched, and have good records of sales growth. 

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