Contrarian investing is one of the simplest strategies for investors to adopt. However, trying to do the opposite of what your instincts tell you can sometimes be a bridge too far, despite the fact that buying what others are selling can work out surprisingly well.
Going against the grain
Indeed, a recent case in point this year is investors who were brave enough to buy the out-of-favour commodity and oil and gas stocks and have seen spectacular gains year-to-date.
For many years, value investors have sought to buy stocks on low PER while selling those that have rerated and trade on higher valuations and they’ve found it a winning strategy.
The contrarian meanwhile seeks out stocks that are typically cheap, and/or out of favour and facing headwinds – be that political, economic, or simply commercial. However, investors should be cautious when the prospects for a business aren’t especially rosy and need to look for signs of improvement as things can often get worse before they get better.
Three companies for the brave
As can be seen from the six-month chart, all three companies under review have disappointed to varying degrees, but is this down to a broken business or simply market negativity? Let’s take a closer look.
Starting with the biggest loser Aberdeen Asset Management (LSE: ADN), a company that has been under pressure for some time due to the negativity towards emerging markets. Management reported the interim results to March 2016 on Tuesday. They were characterised by a backdrop of ongoing fragile investor sentiment towards emerging markets, with the cyclical slowdown exacerbated by the effects of falling oil and commodity prices.
Despite the negativity, management decided to hold the interim dividend at 7.5p, and in the outlook noted tentative signs of optimism from investors who buy into the company’s long-term value-based equity investment process.
Following the share price fall, the forecast PER is a little over 13 times earnings with an expected yield of over 7% for the full year, which should be covered by earnings – just.
Another emerging market player in the doldrums is blue-chip bank HSBC (LSE: HSBA). It’s hardly surprising therefore that the shares are off by around 30% over the last 12 months. It seems that the market was braced for the 18% fall in adjusted profit before tax, only sending the shares down by a few percentage points.
There was also welcome relief for income investors with the dividend held and expected to be more than covered by earnings.
Indeed, like Aberdeen, the dividend yield has risen to over 7%, and with a single-digit forecast PER and a price-to-book value of less than 1, these shares are looking cheap on a number of metrics.
Last up is lesser-known Ocean Wilsons Holdings Limited (LSE: OCN), an investment holding company which, through its subsidiaries, is engaged in the provision of maritime and logistics services in Brazil. Its segments include maritime services and investments.
The shares have been on a bit of a run recently as the market reacted positively to what the chairman described as a strong performance in a challenging market.
As with HSBC, the shares trade on a single-digit forecast PER and yield over 5%, and as with all the shares here, investors could see a rerating should emerging markets turn a corner.