3 contrarian stocks I’m watching in November

October was a rough month for the markets but there are plenty of opportunities about, like these three out-of-favour shares. They are only on my watchlist for now, but could move higher.

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Online gambling software provider Playtech (LSE:PTEC) has had a very bad year. It released a first profit warning last November and a second in July, resulting in a share price drop of over 50%. However if there are no further disappointments then the company now looks very cheap to me. The price-to-earnings ratio (P/E) is less than 8 and it pays a handsome dividend of 7.3%. Anyone who has read one of my articles before will know that I use P/E as the de facto price of a share (assuming it is profitable). I then measure the quality and growth prospects of a company against this ratio to determine if I think it is good value.

A trading update is due on Monday and if positive, then I expect there to be a re-rating of the shares over a sustained period of time. I still consider online gambling a growth industry and Playtech is currently the market leader in the provision of software. This share shows how dangerous it can be to continue to hold a company after a profit warning. It is often best to get out early and wait to see how things shape up over the long term before getting back in. We should have a better outlook on Monday.

Long-term opportunity

AIM-listed electronic component manufacturer XP Power (LSE:XPP) has grown its revenue and net profit for the past seven years. It pays a good dividend of 3.5%, which it has consistently increased, and following a significant re-rating of the share price it now trades on a P/E of just 13.1, which I see as low for a growth stock.

So why has the share price fallen more than 30% since July? XP Power is based in Singapore, manufactures in China and Vietnam and sells mainly in the US, so it is very vulnerable to the current trade war situation. And there is a concern that growth is slowing with sales in Q4 lower than in Q3, the company stating that “growth has moderated slightly.

The big drop in price seems like to me an overreaction and I feel that this share could be a good buy-and-hold investment. The problem is the price is still falling and if results confirm slower growth this share could still sink lower. I’d wait and see.

Market opportunity

Last month I wrote about how housebuilders have become undervalued even though healthy industry growth has defied market sentiment. While I am still concerned about the potential impact of Brexit, most housebuilders are releasing positive updates. Bovis Homes (LSE:BVS) is releasing a trading statement next Thursday which could further confirm the health of the sector (or might not).

Most housebuilders look cheap to me because of investor caution and Bovis is no exception with a P/E ratio of 9.2 and an enormous dividend of 10.2%. Broker forecasts have been repeatedly raised this year and I expect there to be a healthy pipeline of new projects with the extension of the Help To Buy scheme in the autumn budget. If results continue to exceed expectations then we could see share price increases across the board for housebuilders. There is certainly an attractive risk-to-reward profile for Bovis at this price, but I’m staying on the sidelines until I see some price momentum begin to return. 

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 considered so you should consider taking independent financial advice.

Robert Faulkner has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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