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Contrarian investing is a time-tested investment tool, which involves buying or selling stocks that go against the prevailing sentiment of the crowd or the market. It is among the first lessons taught to budding investors and literature on the subject dates back decades, Motilal Oswal said in a report.
The Psychological Edge by David Dreman, Extraordinary Popular Delusions and the Madness of Crowd by Charles Mackay, and The Triumph of Contrarian Investing by Ned Devis are only some of the literary works that help understand this subject of Contrarian Investment Strategies.
The brokerage firm covered two major themes based on consensus ratings (stock popularity) and valuation multiples, and have demonstrated the success of contrarian investing in India.
Bloomberg collects analyst recommendations on each stock and assigns a consensus rating based on these recommendations. It assigns 5 points for every buy recommendation, 3 points for every hold recommendation and 1 point for every sell recommendation.
A consensus rating is arrived at by taking the average of these scores. A stock with a consensus rating of 5 would have all buy recommendations, said the report.
A stock with a consensus rating of 3 would have an equal number of sell and buy recommendations, apart from hold/neutral recommend while a stock with a rating change from less than 3 to greater than 3 has a recommendation change from a net sell to a net buy.
Here is a list of ten stocks to buy based on contrarian investing:
The bank has made significant investments to ride the next growth cycle (post near term asset quality challenges), with support in the form of (1) strong capitalisation (13 percent tier-I) and (2) expanding liability franchise (3,400+ branches).
For FY19, Motilal Oswal expects the bank to report 1.3-1.4 percent return on assets (ROA) and 16 percent return on equity (RoE). Axis Bank features in our list of Buy ideas owing to its presence in Quintile 4 of the popularity metric.
Valuations at 18.7x/15.8x FY18/19E (MOSL Est.) standalone earnings per share (EPS) are attractive, considering (a) scope of profitable market share gain, (b) high visibility of sustenance of superior profitability and (c) lower capex requirement driving return ratios.
Bajaj Auto is also a member of Quintile 4 of the popularity metric – its valuations are at long-period average (LPA), while the rest of the sector is at a premium to its average valuations.
Colgate is a strong play on an imminent rural volume recovery, led by a confluence of positives such as likely normal monsoon, moderate inflation levels, government schemes to boost growth (expansion of DBT benefits, increase in rural allocation in the national/state budgets, and farm loan waivers) and a weak base of the past three years.
Over the medium-to-long term, margin drivers are operating leverage on expanded capacity, lower A&P compared to elevated levels of the past three years and continued premiumisation. Colgate features in Quintile 4 of the popularity metric.
CIL has a strong balance sheet, healthy cash flow, and net cash status. With volume uptick apparent in the recent months, we believe the benefit of operating leverage will result in EPS growth.
Coal India features in Quintile 5 of P/E valuation metric (quintile with lowest P/E) and has valuations which are trading at discount to its LPA.
Idea’s merger with Vodafone will improve its spectrum and data network quality. In the current hyper-competitive market, it will allow Idea to match Reliance Jio’s offering and subsequently arrest market share dilution.
We believe the industry should stabilize in the next 3-4 quarters as Reliance Jio’s free usage offer concludes and its network reaches optimum capacity. The idea has one of the lowest Buy ratings on the street and is part of Quintile 5 of the popularity metric.
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
PNB remains highly levered to the RBI’s resolution mechanisms and an improvement in the recovery environment. Significant stress has been recognized over the last eight quarters, and OSRL has also come off sharply in last one year.
The concentration of Infra (incl. power) and Iron & Steel is very high in stress loans (50 percent+), and any upgrade in these segments can lead to a significant upgrade in earnings. In our view, RoAs and RoEs have bottomed out in FY17, and we expect a gradual improvement here on.
PNB is part of Quintile 4 of our popularity metric and has valuations trading at LPA with less than 30 percent of Buy ratings on the street.
Rural Electrification Corporation (REC)
REC’s near- to medium-term earnings were at risk following the implementation of UDAY. However, progress so far has been encouraging both on the growth and NIM front, and RECL has delivered good results this year.
Despite repayment of DISCOM debt under the UDAY scheme, loan growth is anticipated to be in a positive trajectory, with working capital and refinancing demand on strong turf. RECL features in Quintile 5 of our valuation-based metric, with valuations at LPA.
SHTF’s return ratios are at cyclical lows, with decadal high credit cost and NPLs. We believe the worst of asset quality troubles is behind, and SHTF should witness improving return ratios due to lower credit costs.
Additionally, we believe margin compression fears are overplayed, with the company yet to reap significant benefit on CoF. SHTF is part of Quintile 3 of our valuation-based metric, with valuations at discount to long-period averages
Near-term earnings will be under pressure due to the weak business outlook in the US and the GST impact in India. However, this is more than factored in the recent stock price decline, in our view (valuations at 30 percent below five-year average).
We believe the strategic investments in the specialty business over last 2-3 years, coupled with stable growth in the domestic market and the enhanced focus on complex generics in the US, will help drive earnings growth in the medium term.
Sun Pharma is part of Quintile 4 of the popularity metric, with valuations at 30 percent discount to long-period average.
The gradual recovery in Telecom and continued outperformance in Enterprise are likely to lead to an improvement in revenue growth and profitability, subsequently resulting in valuation catch-up with peers.
Tech Mahindra is part of Quintile 5 of the P/E valuation-based metric, with valuations at ~15 percent discount to LPA.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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