10 stocks for contrarian value hunters

Wild swings in sentiment happen all the time in the stockmarket, and they're often driven by the herding mentality of investors. For some, however, the thrill of chasing new trends is at odds with a style of investing that deliberately goes against the crowd. For these value-focused contrarians, there's money to be made in the stocks that everyone else ignores.

When markets slumped after the technology boom 15 years ago, many investors found themselves nursing heavy losses. Stocks were deeply unpopular, especially those unfortunate enough to have ".com" in their name.

It was the same after the financial crisis of 2008, except then it was banking shares that were pummelled. Even after the recent EU referendum, market swings saw defensive and commodity shares fly, while domestic cyclicals were marked down heavily.

Evolution tells us to move in herds - but it doesn't work so well in investingIn each case, markets recovered and many pariah shares and industries bounced back. Those recoveries were a victory for contrarians who'd taken Warren Buffett's advice of being greedy when others are fearful.

In theory, being contrarian is a simple and effective tactic in investing. It's a strategy made famous by hugely successful investors like David Dreman and Sir John Templeton. But, in practice, it's a discipline completely at odds with how most of us think.

That's no surprise. After all, several billion years of evolution has taught us that moving with the herd (or the pack or the flock) can make the difference between eating and being eaten. But it doesn't work so well in investing. In fact, herd behaviour has been blamed for creating bubbles and crashes in market prices.

Michael Mauboussin, a respected equity strategist at Credit Suisse, recently wrote that great investors don't get sucked into this vortex of influence. But he warns that it requires the trait of not caring what others think of you, which is not natural for humans.

Many of the best contrarian shares have big setbacks, shunned by the market So what should a contrarian investor focus on? According to Mauboussin, the answer is to remember the single most important factor in value investing - to distinguish between the fundamentals of a stock and the expectations reflected in its share price.

In practice, this means that contrarian value investors should be looking for stocks that are priced too cheaply against their underlying value. In many cases, these shares will have hit major setbacks and will be shunned by the market.

Take Plus 500, the financial trading firm that hit regulatory problems in May 2015. At the time, the company's share price fell by 67% in a week. But its underlying financial quality and relative cheapness always looked attractive, even though many thought it could be facing disaster. In a little over a year, the Plus 500 share price has completely recovered, rewarding those that stuck with it.

Screening the market

At Stockopedia, we measure and rank every stock in the market based on their value, quality and momentum - scoring each from zero (poor) to 100 (excellent). All three factors are calculated using a range of the most insightful financial measures and metrics. By focusing on good quality, cheaply priced stocks with poor momentum, it's possible to begin searching for shares that may fit with a contrarian strategy.

These rules deliberately look for shares that have fallen in price in the recent past, but should also pick up good quality firms on attractive valuations. Among them are high street retailers like Bonmarche Holdings, Sports Direct and Marks & Spencer.

Fire alarm distributor Sprue Aegis, shipbroker Braemar Shipping, staffing firm SThree and technical fluid power products business Flowtech Fluidpower make up the industrials.

Elsewhere, there's also a notable inclusion of the housebuilder, Barratt Developments.

Taking contrarian opportunities

Whether it's in momentary market chaos, the final days of a bear market, or one or two beaten-down stocks or sectors, being a contrarian means having the mental strength to go against the crowd.

Traditional value investing is about recognising when the fundamentals of a stock have been priced wrongly by the market. Take that a step further, and being a contrarian is about having the psychological strength to grasp those opportunities.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"