Finding Stocks for a
Contrarian Investing Strategy

A contrarian investor looks for stock pricing inefficiencies that result from the “herd mentality” among investors. Contrarian investing is similar to a value investing approach in that the contrarian is seeking mispriced stocks and acquiring those that would seem to be undervalued. A contrarian is well aware that excessive pessimism regarding a stock can drive its share price to unreasonable lows, creating an opportunity for profit when the stock price corrects. At the same time, the contrarian investor knows to avoid stocks that may be over-hyped, as the inevitable correction in these types of securities can lead to dramatic losses.

The Basics of Contrarian Investing

Contrarian investors do not make a practice of following market trends and sentiment, choosing instead to seek out and invest in stocks that have temporarily and unjustly have fallen out of favor with the stock investing community. Operating in this manner, the contrarian chooses to make stock investments that would seem to run counter to typical investing procedures. The goal of the contrarian is to get into a stock before the rest of the investment world takes notice.

A contrarian investor can operate in both a bull and bear markets as the decisions they make are around the mispricing of specific securities. Generally speaking, the contrarian looks to acquire when pessimism is at is greatest and looks to sell when optimism is at its highest.

Finding Contrarian Stock Investment Opportunities

Like the value investor, the contrarian will only consider stocks that offer solid fundamentals. Many contrarians will only consider companies with significant market-cap, (a minimum threshold of $500 million is common) believing that companies with considerable resources have a better chance to return to prominence. The specific attributes the contrarian will look for might include:

• EPS growth of at least 10% for each of the past three years
• Debt-to-equity ratio of less than .5
• A current share price that is at least 40% lower than its 12 month high
• A PEG ratio of less than 1

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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