Eleven contrarian investment ideas that challenge the consensus

Share

While the market consensus view can often be right, it is also just as capable of producing popular lunacies.

And to blindly follow prevailing sentiment exposes the overly conformist investor to a particular form of investment risk.

"Such … tail risk may become manifest in both an underappreciated range of future events, as well the stock impact such scenarios may produce," BMO Nesbitt Burns's Canadian and U.S. equity research directors said in a report.

This, of course, is the basis for contrarian investing, which is easier said than done, the report stated. Effectively challenging the consensus requires an examination of one's basic investing tenets to ensure conviction is not derived from the "comfort of the crowd," nor from blind opposition to it.

"While we don't explicitly seek to engage in a strategy of contrarian investing, we do seek inflection points that are either less understood or less well known, which can offer a first-mover pivot that will generate alpha as the herd eventually changes course," the authors said.

The report offers up 11 selected contrarian investment ideas from across BMO's analysis platform. There is one Canadian recommendation on the list: Genworth MI Canada Inc.

The analyst coverage of Genworth's stock is almost uniformly neutral, with all but BMO's analyst focused on the potential for rising costs from mortgage delinquencies. Genworth has a considerable presence in Alberta, and the economic strains and job losses brought on by the oil crash are causing the company's claims costs to rise.

But strength in the Ontario and British Columbia markets are helping to offset the pressure cheap oil has put on Genworth's business. "We believe the company is well positioned to manage through economic pressures in oil-exposed regions," BMO said. Its outperform rating on the stock is the sole outlier.

Here are BMO's other contrarian investment ideas, with some analyst commentary for each.

Archer Daniels Midland Co.

(ADM-N) Rating: Outperform

Bunge Ltd.

(BG-N) Rating: Outperform

"We believe there is a striking disconnect between ADM's and BG's recently reported lacklustre second-quarter results and the earnings power we expect them to begin to show in the fourth quarter and to continue to build in 2017. In fact, our forecasts indicate that ADM and BG will achieve some of their highest-ever run-rate EPS growth in those time frames."

Bloomin' Brands Inc.

(BLMN-Q) Rating: Outperform

"Driven by a continued deterioration in same-store-sales trends, investor sentiment on BLMN shares remains decidedly negative. While we acknowledge the top-line challenges, we are buyers of BLMN as we believe its earnings potential over the next 18 months is materially underappreciated."

Capital One Financial Corp.

(COF-N) Rating: Outperform

Synchrony Financial

(SYF-N) Rating: Outperform

"With the first quarter marking the first time since the Great Financial Crisis that system-wide credit quality declined, investors understandably have increased fear about a sharp inflection in this critical factor for financials. However, we actually forecast the opposite – an improvement in system-wide credit quality."

Harley-Davidson Inc.

(HOG-N) Rating: Outperform

"HOG is now among the most universally unloved stocks in the leisure industry. Following our recent upgrade, we are one of only three analysts – out of 20 – who rate the stock outperform. We expect the September release of new 2017 models to unleash pent-up demand and to support our thesis that the company is accelerating consumer-focused new product development."

IHS Markit Ltd.

(INFO-Q) Rating: Outperform

"While we initially counted ourselves among the skeptics on the proposed merger of IHS and Markit, a deeper look at the potential benefits of the combination caused us to separate from the pack. Our positive outlook is based on our expectations for cost synergies, revenue synergies, and other benefits, such as greater global use of its cash base."

Pacira Pharmaceuticals Inc.

(PCRX-Q) Rating: Underperform

"We stand alone as the only firm with an underperform rating, which is based on our expectation that estimates for key product Exparel will need to be reset lower over time and that the stock's current valuation leaves little wiggle room if expected outcomes do not materialize."

SunOpta Inc.

(STKL-Q) Rating: Outperform

"We believe general apathy toward STKL, partly driven by misplaced leverage/financing concerns, has created an attractive risk-return profile for the company's shares."

Texas Instruments Inc. (TXN-Q) Rating: Outperform

"While two-thirds of the Street remains neutral to bearish on TXN, we expect our multi-year thesis of returning its increasing cash flow to shareholders through share repurchases and dividends to continue to play out over time."

W.P. Carey Inc.

(WPC-N) Rating: Outperform

"Among the eight analysts who cover WPC, we have the lone outperform rating. We base our positive view on a tangible catalyst within six to nine months – an expected change in investor attitude toward its non-traded REIT business following industry and regulatory reforms this year, and a compelling valuation."

Whole Foods Market Inc.

(WFM-Q) Rating: Underperform

"Contrary to about 80 per cent of the Street, which is positive to neutral on former investor darling WFM, we remain bearish on the stock. We see a risk that comps may not re-accelerate as expected, absent more aggressive pricing actions. Thus far, competitive pressures have outweighed the company's pricing strategies."