3 Top Contrarian Stocks: Rio Tinto plc, Standard Chartered PLC And WM Morrison Supermarkets PLC?

Rio Tinto plc (LON:RIO), Standard Chartered PLC (LON:STAN) and WM Morrison Supermarkets PLC (LON:MRW) could reward bold investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the world of investing, if you run with the herd, the herd is the market — and the investment return of the market is about the best you can hope for. There’s nothing wrong with that, but buying a cheap FTSE 100 tracker is the easiest way to do it!

If you aspire to make a better return than the market, you have to go against the grain to some degree. That means investing in at least some companies that are out of favour. Such companies are higher risk — or are perceived to be higher risk — but have the potential for superior rewards.

Making a contrarian investment can be uncomfortable. In the short term — even the medium term — unloved companies can remain unloved, or fall still further out of favour with the market. But many out-of-favour stocks come good in the long run.

Right now, Rio Tinto (LSE: RIO) (NYSE: RIO.US), Standard Chartered (LSE: STAN) and Wm Morrison Supermarkets (LSE: MRW) are some of the most deeply unfashionable stocks in the FTSE 100.

Rio Tinto

The shares of mining giant Rio Tinto made an all-time high of around £70 in the summer of 2008. After the market crash, they climbed back to £45 in 2011, but have since been in decline, and are currently trading near to £25.

Oversupply has taken its toll on miners’ profits and concerns about China’s economy have worn away at investor sentiment towards the industry. But Rio is a top-class business. And, as one of the world’s lowest-cost producers of iron ore — at not much more than $30 a tonne — the company can still make a profit at prices of $40 or even sub-$40 that some analysts are predicting. At those sorts of prices, many rivals would be plunged into losses.

Rio acknowledges that the iron ore price went to “an unprecedented high that was never sustainable”, so we’re not going to see the company’s shares as high as £70 again for many years. But we don’t need to. There’s still the potential for very strong gains, because the current share price is so depressed. Rio’s forecast price-to-earnings (P/E) ratio is an encouraging 15, while the prospective yield is a whopping 5.8%, with the dividend comfortably covered by earnings.

Standard Chartered

Standard Chartered was once the bank that could do no wrong. Operating predominantly in Asia and emerging markets, StanChart comfortably weathered the financial crisis of 2008/9. By late 2010, the company’s shares were back to their pre-crisis level of close to £20. Today, they’re trading at about £10.

In some of its operations, StanChart has faced macro-headwinds, but it has also had company-specific issues. A rise in bad debts is one of a number of concerns that may yet result in a capital fund raising and/or a dividend cut.

Nevertheless, StanChart remains well-positioned to benefit from the long-term growth of developing economies. And, with the share price thoroughly depressed, a forecast P/E of just 11.4 and a yield of 4.7% (based on analyst forecasts of a reduced dividend), the stock could deliver for contrarian investors buying for the long haul.

Morrisons

Morrisons’ shares were well above £3 at the end of 2011. But changing shopping habits, and the assault on traditional supermarkets by no-frills discounters — notably Aldi and Lidl — have taken their toll. Morrisons shares are currently trading below £1.75.

Morrisons is a particularly unloved stock in a troubled sector. I think those contrarian investors who are buying in the sector are doing so on the basis that bigger is better, and are plumping for Tesco or Sainsbury’s over “weakling” industry no. 4 Morrisons.

However, Morrisons has a number of strengths that are perhaps overlooked. For example, historically, Tesco’s margins benefitted from its sheer size, but Morrisons’ margins weren’t far behind, thanks to its unique level of vertical integration. Sainsbury’s was the weakling on margins. Currently, Morrisons has the strongest balance sheet, and holds far more freehold property than its rivals. Tesco is the weakling when it comes to the balance sheet.

Morrisons’ earnings decline is forecast to bottom out this year. And with 20% growth forecast next year on a P/E of 13 — giving a very attractive P/E to growth ratio of 0.65 — the potential reward for contrarian investors could be considerable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »