Go to the Globe and Mail homepage

Jump to main navigationJump to main content

NUMBER CRUNCHER

Beyond fear and greed: Contrarian stock plays Add to ...

What we’re looking for

Contrarian plays from North America and Western Europe.

Knowing that fear and greed are the prime emotions that drive markets, learning how to view stocks from a contrarian perspective can be quite useful.

Contrarian investors excel at identifying inefficiencies in the markets, namely stocks that have swung too far in either direction as a result of excessive fear or greed.

More related to this story

A popular contrarian investing tactic is the “down by half” rule, which gives investors searching for undervalued stocks an indication of where the crowd isn’t.

It works by identifying stocks that are trading at less than half of their 52-week high.

Far from a definitive screen, the down-by-half rule is actually a starting point for the discovery of value stocks. To dig deeper, we’ll also look for companies that meet two of the following four criteria:

- Price to earnings (P/E) ratio of less than 12

- Price to free cash flow (P/FCF) ratio of less than 10

- Price to book value (P/BV) ratio of less than 1.0

- Price to sales (P/S) ratio of less than 1.0

Along with the less than half rule, any stock meeting two of the above criteria lives in contrarian country.

What we found

Miners make up four of the top five companies on the list, all of whom are suffering from long declines from at least December, 2011, making them prime contrarian candidates.

The screen’s top pick, Iamgold, has been sliding since last Nov. 4, despite gold’s recent bull run. However, its P/E ratio is 9.57 (well below 12) and its P/BV ratio is 0.99, which just squeaks in under the limit.

Digging further, we learn that Iamgold’s recent acquisition of Ontario-based explorer Trelawney brings the company closer to two key goals – offsetting an Africa-heavy portfolio and doubling production within five years. So, while the market thinks the stock is worth $9.50, contrarians will bet that a diversified asset field and increasing production levels will push it much higher.

Follow on Twitter: @JodyJodyWhite

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories