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DYK What is contrarian investing
Contrarian investing means buying stocks that are currently not popular
People usually begin thinking of investing in stocks when stock markets are going up. Markets are on a roll right now, with the S&P BSE Sensex touching its lifetime high of 22,040 on 18 March 2014. While there are many strategies to invest in equity, some investors like to take what is called a contrarian view.
What is a contrarian view?
The dictionary meaning of contra is opposite or against. Contrarian investing essentially means buying stocks that are currently not popular with investors, for various reasons—company is growing too slowly, a stock has low price-earnings (P-E) ratio compared with the broader market, or simply because the market is not enthused about the sector the stock belongs to.
An example of a contrarian view gone right is information technology (IT). In 2007 and (early) 2008, when the equity markets were marching full steam ahead, two sectors were not—IT and telecom. At that time, Indian rupee was trading in the high 30s against the dollar; an appreciating rupee is bad news for the IT sector. Today, the tables have turned. With rupee having depreciated to around 60 against the dollar, IT stock prices have risen considerably. BSE IT index has gone up 55% since January 2013 and BSE Teck by around 42%.
If you had invested in undervalued IT scrips in 2007 or early 2008, you would have gained considerably. Infosys Ltd, a stock that many stayed away from due to poor guidance from the company, has gone up 87% since the start of 2008.
Identifying contrarian sectors
Contrarian investing isn’t just about beaten down sectors. The general view is that fast-moving consumer goods stocks are overvalued at present, and stock prices may correct as they have already seen a lot of upside. A contrarian view here would mean that despite these reasons, you stick to investing in FMCG.
When identifying such stocks and sectors, it is very important to take note of the management’s quality. Another factor is the company’s debt position. If a company has huge debt in its balance sheet, and if there are weak or no chances of it coming down, it is best to avoid the scrip.
According to market watchers, the contrarian sector at the moment is infrastructure. Stocks in this sector are trading at low P-E multiples. Power sector stocks (a part of the infrastructure space) are trading at an average P-E of 10, whereas the Sensex is at 17.75. If there is a new government with a clear majority, then infrastructure spending may pick up. Which means power, cement, metal and public sector bank stocks may earn good returns.
Is it for you?
Direct investment in stocks is always tricky. So, identifying contrarian sectors and picking a potential winner will be rather difficult. Contrarian calls have high risk as others are not willing to invest in these stocks and the holding period may be longer than expected. Look at this strategy only if you are a well-versed equity investor, and have the appetite to absorb losses.
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First Published:21 Mar 2014, 07:04 PM IST
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