I’ve found that contrarian investing, which involves
buying out-of-favor stocks, can be profitable, even in down markets.
For instance, last October, I published an
article on the topic that recommended four ‘out-of-favor’
stocks.
That portfolio averaged an 8.8% return from the
publish date (10/8/21) through August 17, compared to the S&P 500’s
9.1% loss over the same period.
In recent months, I’ve done more research on the
topic and today I’m going to describe a new Contrarian screen based
on those findings. Here are the details.
Use
Finviz Screener
As usual, I’ll use the free and user friendly Finviz
stock screening program to build my new Contrarian portfolio.
Start from the Finviz homepage (finviz.com) by
selecting Screener. Finviz uses “filters” to search for stocks
meeting your selection criteria. Select “All” on the Filters bar to
see all of the available filters.
Setting Up the Screen
For starters, because the U.S. economy is the
strongest, limit your choices to U.S.-based stocks by using the
Country filter and specifying “USA.”
Next, use analysts buy/sell ratings to limit the list
to stocks that are out-of-favor with those analysts. Here’s how.
Although analysts use a variety of 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. However, 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.”
Specify “hold or worse” using the Analyst
Recommendation filter to limit your list to stocks analysts are
advising selling.
Earnings Drive Share Prices
I’ve found that share prices track earnings per share
(EPS) closer than any other single factor. However, many analysts
don’t seem to agree and forecast strong earnings growth for stocks
that they’re telling us to sell.
So, specify “over 30%” for EPS Growth This Year and
for EPS Growth Next Year to limit your list to stocks expected to
record strong future earnings growth numbers.
Profitable Stocks
Only
If you’re looking for share price appreciation,
you’ll always do best limiting your list to profitable stocks both
in terms of reported earnings as well as free cash flow.
For earnings, use the Return on Equity filter, which
compares Net Income to Shareholders Equity, and specify “Over +5%”
to rule out unprofitable stocks.
“Free cash flow” is the excess cash remaining after a
firm has paid out all of its necessary expenses. It’s a positive
number if the firm generates more than enough cash to cover
expenses, and a negative number if it doesn’t.
Since Finviz doesn’t directly offer a free cash flow
filter, specify “Over 5” using the Price/Free Cash Flow filter which
can only be true when free cash flow is a positive number.
Make
the Trend Your Friend
Finally, since stock prices tend to move in trends,
it’s best to start with uptrending stocks. So, using the Performance
filter, specify “Month +10%” us to limit your list to stocks that
have moved up at least 10% over the past month.
Six Contrarian Plays
My screen turned up
six stocks when I ran it
today (8/17/22).
Brighthouse
Financial (BHF), CBTX Inc. (CBTX),
EnLink Midstream (ENLC), Live Oak Bancshares (LOB),
Pinterest (PINS), Umpqua Holdings (UMPQ)
and Yelp (YELP).
As always, consider the results of any screen as
research candidates, not a buy list. The more you know about your
stocks, the better your results.
published
8/17/22.
