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Black-sheep stocks for contrarian investors

What are we looking for?

Black-sheep stocks.

A strong consensus bearish opinion is reason enough for some investors to go bullish. And for successful contrarian investors, the first step is to identify stocks that have run afoul of the Street.

So we went searching for stocks ill-regarded by the analyst community.

How did we do it?

We first established some criteria to identify stocks that are dramatically out of favour. The consensus recommendation calculated by Bloomberg rates stocks on a five-point scale, which assigns lower numbers to stocks lacking popular support. We filtered out all stocks that had a score higher than 3.

We also chose to avoid stocks with too little coverage, as their scores might be skewed by a handful of strong opinions. So, eligible stocks had to have at least 10 analysts issuing recommendations. And at least three of those analysts had to have "sell" ratings on the stock.

Now with a pool of contrarian candidates, we set some conditions for size, profitability and valuation.

A minimum market capitalization of $500-million, in local currency, was applied. The average return on equity over the past five years had to be at least 12 per cent.

And we capped the estimated price-to-earnings ratio for the current year at 17, which is roughly the average multiple at which both the S&P 500 index and the S&P/TSX composite index trade.

What did we find?

A total of 21 stocks met all of the conditions. Only three Canadian names made the list. Canadian Oil Sands Ltd. has disappointed analysts with a string of operational issues. Imperial Oil Ltd., meanwhile, has not met production forecasts at its Kearl oil sands facility.

The only non-resource Canadian name on the list is National Bank of Canada, which is facing concerns about its wealth-management business.

This list may provide a good starting point to identify outcast stocks, but further research would be required to determine whether the Street is wrong about any of them.

Contrarian candidates

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