Harry Domash's Winning Investing



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

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