Contrarian investing is more an art than a science. It’s something that’s much talked about, yet real contrarian investing is a lot harder than you think it is.
Why? Because the natural human instinct is to run with the crowd rather than go against it, to chime in with the consensus rather than sound dissonant. Yet contrarianism is all about going against what most people are thinking.
Financials have been hurt by Brexit
Financial shares have been badly hit by the Brexit vote. This includes both the retail banks, and insurers like Legal & General Group (LSE:LGEN). Is this flight from financials justified by the crisis at hand? I’m not sure it is.
Legal & General is a global financial services business founded in 1836 that now has operations in the UK, mainland Europe, the Gulf, India and the US. It provides a broad range of life insurance, pensions and investment products to its customers.
The company has been doing well in recent years, with earnings rising after the Credit Crunch, and a trailing P/E ratio of 10.5. An impressive dividend yield of 7.05% shows the firm is going cheap at the moment. What’s more, a price-to-book ratio of 1.8 is further proof of how reasonably priced the shares are.
The shares had a strong bull run after Legal & General recovered from the Crisis, but a pullback that has accelerated after Brexit means the stock is now particularly good value. I think the recent dive isb’s an excuse to sell your holding, but instead has created a buying opportunity.
Opportunity knocks
And while all financials have fallen sharply in the past few weeks, LGEN’s valuation is bolstered by the profits it’s reporting. The same couldn’t be said of peers such as Royal Bank of Scotland or Lloyds Banking Group which, until now, have just barely been breaking even.
But this really is an exploration of the unknown. I think there has never been a crisis to hit Britain that has been quite like Brexit. Whereas in previous recessions virtually all stocks and all sectors were uniformly marked down, we’re currently seeing a strange dichotomy, with many international firms, exporters and defensive shares on the rise, while domestic investments such as the banks, housebuilders and insurers on the slide.
But if you can pick out companies that have strong fundamentals, then you might just be able to spot a bargain. And I suspect that long term, many businesses in these weak sectors will bounce back, as sometimes the initial gut reaction can prove to be wrong.
That’s why I think Legal & General could be a worthwhile addition to your portfolio, as a company that promises both high yield and growth. But in this new and unique investing environment, you’ll need to tread carefully.
