Following the herd hasn’t paid off much lately: The stocks that have been most overweighted in portfolios have risen just 0.2 per cent in 2014, says Savita Subramanian, equity and quant strategist at Bank of America.
Savita Subramanian argues that going against the grain is more important than ever. But what is the grain these days?
According to Bank of America's equity and quant strategist, it is a bearish disposition with a preference for cash, defensive stocks and companies that have shown strong growth in a weak economy. Avoid this approach, and you might be able to call yourself a contrarian – and benefit from it.
"Changing leadership in the market coupled with evidence that the investment community has crowded into the same themes suggest that being a contrarian is of paramount importance today," Ms. Subramanian said in a note.
When taking the pulse of investors, she prefers to focus on the Wall Street pros. There, she finds that strategists are recommending a low exposure to stocks in their asset allocations – a measure of bearishness that is lower than it was at the market lows in March, 2009.
As well, fund managers have been slashing their exposure to cyclical stocks (such as consumer discretionary, energy, tech, industrials and materials) and moving into defensive stocks at the most aggressive pace during five-year bull market. Similarly, cash allocations among global money managers have risen above 5 per cent, which is high. It suggests considerable nervousness that tends to coincide with bull markets rather than bear markets.
The consensus approach hasn't been paying off though, especially when you look at stocks that have been most overweighted in portfolios: So far this year, these favourites have risen a mere 0.2 per cent, according to Ms. Subramanian, compared with a gain of 9.5 per cent for the most shunned, underweighted stocks in portfolios.
Over all, then, she believes the contrarian approach points to cyclical stocks. "Within equities, the buy side is less exposed to cyclicals than they have been at any point since the crisis," he said. "The last several years saw investors shunning cyclicals – especially foreign-exposed cyclicals – amid concerns of slowing global growth. Positioning today reflects yesterday's backdrop, rather than what is likely to come."
To find the contrarian opportunities, she ran a stock screen for companies within the S&P 500 that are sensitive to economic growth, are cheap based on forward price-to-earnings and haven't yet been scooped up by fund managers.
Among them: Mohawk Industries Inc., Macy's Inc., Diamond Offshore Drilling, ConocoPhillips, Citigroup Inc., Hartford Financial Services Group, Kimco Realty Corp., General Electric Co., Cisco Systems Inc., EMC Corp. and Freeport McMoRan Copper & Gold.
Not keen? Then consider joining the consensus. According Ms. Subramanian, some of the more crowded trades include Chipotle Mexican Grill Inc., Netflix Inc., Michael Kors Holdings Ltd., Facebook Inc., Mastercard Inc., Visa Inc. and Salesforce.com.
David Berman