Buying a stock when everybody else thinks it’s a great idea to buy isn’t a recipe for success. If everybody’s buying, the stock is likely to be at an inflated valuation, and your investment returns may be disappointing.
Tomorrow’s big winners often come from the stocks that nobody is interested in buying today. Of course, it’s harder to go against the crowd, particularly as unloved stocks often remain unloved for some time, but the long-term rewards can be handsome.
BP (LSE: BP), Glencore (LSE: GLEN) and Latchways (LSE: LTC) are three stocks the market is currently shunning, but which could be great contrarian picks.
BP
The collapse of the oil price over the last year has naturally sent the shares of oil companies plunging. A brief bounce in the oil price in the spring hasn’t lasted, and it’s back to doom and gloom.
Good news earlier this month that BP has reached agreement to settle all US federal and state claims arising from the Gulf of Mexico oil spill of 2010 hasn’t stop the company’s shares from falling back to flirt with the 400p level, through which they dropped for a spell or two in January.
Industry insiders and analysts expect the oil price to remain depressed for some time. However, BP’s dividend yield in excess of 6% appears good compensation for holding the shares, and a current-year forecast P/E of 16, falling to 13 next year, promises great scope for a substantial re-rating if, as the consensus appears to be, the oil price recovers over three to five years.
Glencore
Mining is another depressed sector where the supply-demand equation is out of kilter and where world prices — metals, in this case — are depressed. The contrarian case for looking at miners is much the same as for looking at oil companies.
Glencore isn’t a ‘common-or-garden’ miner, but is a producer, marketer and trader across the commodities spectrum: metals and minerals, coal and oil, and agricultural products. I’ve never fully understood the finer details of the business model, but it’s a comfort that Glencore’s veteran industry executives describe themselves as “an owner-oriented management team wholly aligned with external shareholders”.
Glencore’s shares are trading at multi-year lows, and have the potential to make spectacular gains further into the future. In fact, analysts expect a decent bounce-back in earnings as early as 2016, putting the company on an attractive P/E of 13 with a 5% yield.
Latchways
Latchways is a much smaller company than BP and Glencore, but is the world number one in its niche of fall protection equipment for people working at height. The company isn’t as exposed to the kind of great macro winds that pull or push oil companies and miners, but it has suffered from cyclical weakness in some of its markets over the last two years (for example, in commercial construction in parts of Europe).
Nevertheless, Latchways has continued to invest in its business for the future, where there are strong drivers for long-term growth: increasing safety legislation around the world, and employers’ willingness to pay up for top products from a trusted source.
Latchways shares have almost halved from their record high of late 2014, despite analysts’ forecasts that earnings growth will start motoring again this year. A P/E of 14.4, falling to 13 next year, looks attractive, alongside a dividend yield of over 5%. Latchways appears another great contrarian pick that could deliver a superior long-term return for patient investors.
