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.
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.