New Contrarian Strategy,
Version Two
Around two month’s ago, I described a
contrarian strategy that involved
picking stocks that analysts were recommending selling,
despite also predicting
strong earnings growth.
That portfolio produced a list of five stocks that as of
October 25, had dropped 4%.
While that beat the markets’ (S&P 500) 10%
drop, it still lost money.
Today, I’m going to describe a
modified version that, in theory, should produce stronger returns.
It’s still a contrarian strategy, which means that we’ll
be buying currently out-of-favor stocks. Here are the details.
Set Up
Screener
As usual, we’ll use the free Finviz stock screening
program to build our Contrarian portfolio. I mostly use the Finviz
screener to demonstrate building screens because it’s free, user
friendly and offers a wide range of useful screening tools.
Start by selecting “Screener” on the toolbar located near
the top of the Finviz homepage (finviz.com). Then select “All” on the
Filters bar to see the available screening filters.
Because the U.S. economy is currently the strongest,
limit your candidates to U.S.-based stocks by using the Country filter
and specifying “USA.”
Next, we’ll limit our list to stocks currently
out-of-favor with most stock analysts.
Out of
Favor Stocks
Although analysts use different terms to describe their
buy/sell opinions, Finviz boils them down to “strong buy,” “buy,”
“hold,” “sell” and “strong sell”. Except for “hold,” the meanings are
self-explanatory.
To avoid antagonizing company executives, many analysts
rate stocks at “hold” when they really mean “sell.” Thus, for our
purposes, “hold,” “sell,” and “strong sell” all translate to “sell.” So
specify “hold or worse” using the Analyst Recommendation filter to limit
your list to stocks analysts are advising selling.
EPS
Growth Drives Share Prices
Share prices track earnings per share (EPS) closer than
any other single factor. Nevertheless, for reasons unknown, even though
they’ve forecast strong earnings growth numbers which should drive share
prices higher, many analysts rate those same stocks at some variation of
sell.
Specify “over 30%” for EPS Growth This Year as well as
for EPS Growth Next Year to limit your list to stocks expected to the
fastest EPS growers.
Stick to Profitable Stocks
I’ve found that stocks issued by profitable companies
typically outperform unprofitable stocks. Thus, use the Return on Equity
filter, which compares Net Income to Shareholders Equity, and specify
“Over +5%” to rule out unprofitable stocks.
Smart
Money Knows
Next, since institutional
buyers often have access to information that
we never see, specify “Positive” for Institutional Transactions to limit
your list to stocks that these wired-in players have been recently
buying.
Make
Trend Your Friend
Finally, since share prices tend to move in trends, it’s
best to limit your list to uptrending stocks. Do that by using the
Performance filter to specify “Month Up.” Then, specify “Week Up” using
the Performance 2 filter to assure that your stocks are still moving up.
Five
Contrarian Plays
My screen turned up five stocks.:American
Airlines (AAL), Abercrombie & Fitch (ANF), RPC, Inc. (RES), REV Group (REVG),
and Yelp (YELP).
These are my ideas, but do your own due diligence. The
more you know about your stocks, the better your results.
Published
10/26/22 |
