Contrarian Investing – Strategy For All Seasons

Contrarian investing is as old phenomenon as investing itself. It is one of the most revered investing philosophies and somewhat overlaps with the value investing philosophy. 

Contrarian investors, like value investors, attempt to identify investing opportunities that are not on the investment radar of majority of investors. The contrarian investors are always looking for financially solid companies that are temporarily out of favour in the market and are priced low when compared to their earnings. Contrarian investor is an independent thinker and chooses not to follow the crowd. A true contrarian defines value differently and believes that the real “value” is at the extreme – low P/E, low P/B, low P/CF and high dividend yields. A contrarian investor has to show patience as his contrarian bet may take ages to fructify. It is observed that value stocks remain undervalued for extended periods of time and this is because the market may not recognise the intrinsic value of the undervalued securities for years together. 

When a contrarian investor takes a bet on a value stock that is out of favour in the market it is almost impossible to predict when the stock or the sector will start recovering and catch investors' attention. It is safe to say that any contrarian investors need to have an investment horizon of more than three years at least. 

While, on the face of it, contrarian investing sounds easy and appealing as it involves going against the current views of majority of the investors, but to implement it practically, the contrarian investment strategy is one of the most challenging ones and requires astute understanding of how market works. 

A contrarian investor should be able to relate the stock prices with the valuations and often a successful contrarian investor is one of the most confident persons you will see around. The contrarian investor is also a person who understands psychology of investors the best and has a deep understanding of the business cycles in the economy. A successful contrarian investor also has unique ability to assess the market situation correctly which helps him decide on the course of action to be taken which may not be in line with the actions taken by majority of the investors. 

Says Tejas Khoday, Co-Founder & CEO of FYERS, “ Contrarian investing requires a different kind of mindset altogether. It requires you to be cynical when others are optimistic and optimistic when others are cynical. Doing the opposite of everybody else with money on the line requires a lot of courage. The ones who are good at it, flourish like no other. 

One of the most common misconceptions about people who adopt this method is that they are in denial and do the exact opposite of the trend. That is actually not true. In reality, this breed of investors are patiently waiting for the worst events and news to get discounted in the stock price so that they can buy stocks at a cheap price and bet on a possible turnaround of companies. 

❝You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.❞ – Benjamin Graham

Also, they do not always have the opposite standpoint when it comes to investing, it’s just that they are focused on finding great opportunities which are near their inflection points. In other words, they are trying to get the best deal before others discover them. Another common misconception is that contrarians buy stocks which have collapsed and continue to buy them on the way downward. This is not true at all. In fact, contrarian investors have to be very careful while buying bearish stocks because falling knives can easily take away their hard-earned capital and diminish the ROI if and when the turnaround actually happens.” 

Higher ROI is one of the most important benefits of contrarian investing, and according to Tejas, “ the performance of a contrarian portfolio tends to be less correlated with the wider market and hence, it can give good returns when

Trend followers look smart while the trend persists. Conversely, the contrarian looks like an idiot most of the time, but in the end, he is the ultimate winner who ends up making some real wealth. It is the basic human nature that makes it hard for both professional and private investors to practise contrarian investing.

Dhruv Desai, Director & COO, Tradebulls Securities 

Patience is not just a virtue but a necessity for contrarian investors

What are the key benefits of contrarian investing? 

It goes against human nature to stand out. Contrarian investing is not to be in the herd, but to zig when others zag. It means to be in minority. One of the veteran investors Warren Buffet is also a famous contrarian who sternly believes in buying when others are selling (fear) and selling when others are greedily buying. 

The key benefits of contrarian investing are buying stocks whose risk is low, since it is already perceived by the crowd as underperformer. The crash of 2008 is a classic example when majority were selling shares from their portfolios and fleeing to the perceived safety of cash, while for contrarian investors, it created incredible buying opportunities. Now, with the internet age where market news moves in sub-seconds, any big newsflash that traders think will help in moving the stock has already been factored. The market has repriced before it gets past the specialist wires. So it is the herd that gets trapped on the news-based investment, which the contrarian investors avoid. 

Does contrarian investing always work? 

There is no investing theory that always works. Contrarian looks like an idiot when market is trending and people are over-bullish, but when trend reverses, they are dismissed as lucky. Contrarian theory works better if investors have stock screening model and they are not just investing in any random buy on panic stocks or any penny stocks. However, if the stock screening model is applied, then more or less the contrarian theory works. 

What are the risks in contrarian investing? 

The risk of contrarian investing is loss of capital. However, as we said, to safeguard that, investors need to apply stock screening model and not just buy any random down-on-luck stocks or penny stocks. We have seen many stocks that failed to provide any returns even after market reaching all-time high. Some of the stocks that can be identified for contrarian investing are identifying companies with solid brands and good cash flows that are suffering a temporary economic setback and would benefit from a recapitalisation and management change. Buy solid companies currently out of market favour, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios. Perfect example is the pharma sector right now. Second, to minimise risk, contrarian investing should diversify by investing in 10 to 20 stocks and not just bank on 1-2 stocks. 

For contrarian investors, patience is not just a virtue but a necessity, as they need to wait patiently for the company/ economy to turn around.

conditions are bullish, moderately bearish or neutral.” 

Contrarian investors always have opportunities in the market as investors are prone to overreact and, according to Dreman, an expert on behavioural finance, investors under certain, well-defined circumstances overreact predictably and systematically. Dreman’s contrarian investing approach suggests that investors tend to under-price those stocks that are touching new lows and are also flooded with negative news. In such circumstances, investors typically under-price securities. 

SITUATIONS UNDER WHICH CONTRARIAN INVESTMENT PHILOSOPHY IS USEFUL 

Market may focus on wrong metrics for a company:- Markets may be focusingon a totally wrong metric for a company. For example, there could be a law suit worth millions of dollars against the company and all the investors might be focused on this negative news, while the company is quietly winning several orders leading to a large order book size. While majority of the investors will be focusing on the negative news facing the company, a contrarian will simple focus on the maths and if the expected net result is positive, a contrarian will have a bullish view on the stocks thus contradicting the view of the larger audience. 

Short term bias:- Majority of the investors may be thinking too short term for a company or the sector. A contrarian investor guided by his basic contrarian investment strategy always takes a long term call, thus avoiding a short-term bias. In the short term, the stock or sector

Warren Buffet is world’s most popular contrarian-value investor who made a career spanning decades by buying boring but highly profitable companies at reasonable prices. In his career, he has bought a struggling newspaper company, several banks, a chewing gum company and hundred others at low prices.

could be impacted by extreme pessimism or negative sentiment in the sector or stock, thus pushing stock prices below its intrinsic value. A proven contrarian investor will have an uncanny ability to identify such mis-pricing in the securities and can make some interesting return on invested monies as market starts looking forward. 

Overreaction to news/opinion/data :- Markets have a tendency to overreact both on the upside and on the downside, when hot with news. Relevant news, it is seen, push the stocks to unsustainable levels and thus create opportunities for contrarian investors. Donald trump being elected as US president was one such global news which pushed the stock prices deep into the red. For any contrarian, such news that impacts stock prices in the short run is simply a perfect buying or selling opportunity depending upon his long-term view on the stock in particular or the markets in general. 

Investors misunderstand an important larger event involving the economy or markets: For example:- Demonetisation was considered negative for the markets by majority of experts and investors in general were pessimistic on market outlook. Such market correction driven by a major event such as demonetisation is a thriving ground for contrarian investors who tend to think long term and do not fall prey to the herd mentality. 

Incorrect comparison to the historical events:- Let’s say there has been an interest rate hike by the RBI. Historically, whenever the rate hike is announced, equity prices have fallen across global markets.

While the empirical evidence may prove that the interest rate hike is bad for equity prices in short to medium term, a contrarian investor may take a view that may be the interest rate hike cycle has peaked and he will have a bullish stance on the market. 

CONTRARIAN INVESTING VIA MUTUAL FUNDS 

Contra funds are mutual fund schemes

Pankaj Karde,
Head - Institutional Sales and Sales Trading, Systematix Shares 

Why contrarian strategy works and under what assumptions does it work? 

Contrarian strategy works in the mid to long term. It works under the following assumptions: 

a. The company in itself is good, but the external and economic factors are responsible for underperformance
b. The sector or company has seen a downturn and that there is limited downside
c. The company has the potential to bounce back sharply when the cycle turns
d. The management of the company has done the turnaround in the past and can do it again
The management has made mistakes in the past and that won’t be repeated again. 

At the current juncture do you think adopting contrarian view may work out to be market beating strategy? 

I believe that a portfolio should consist of one or two contrarian strategies and not more. These stocks will perform well in the long run. So they can be in your holdings for a very long time without giving returns or giving negative returns. In the current scenario, we have seen good stocks doubling or tripling. I don’t see such a strategy beating markets in the short run. Markets are currently buoyant and you may feel that your money is stuck in non-performing stocks. So you could allocate 10-15% of your equity portfolio for the contrarian bets .

Prasanth Prabhakaran,
Senior President & CEO, YES Securities India Ltd. Securities

Why contrarian investor earn better returns? 

The stock market has a way of consistently overvaluing prospects of highly regarded companies and just as consistently undervaluing those that appear to have lacklustre outlook. 

History indicates that in a great majority of cases, there has been a resurgence of earning power, followed by renewed enthusiasm and higher market prices for such out-of-favour stocks. 

To understand the contrarian approach, we must first examine analyst/investor errors. Analysts/Investors are too confident in their ability to forecast the future. This leads to over/under valuation of stocks and opens the doors for the contrarian investor who is able to identify these errors. Analysts' estimates have been sharply and consistently off the mark. Low P/E under-the-radar stocks with positive surprises outperform the market by more than 10% in the following year as compared to favourite analyst stocks which return far lesser in the following year. Conversely, negative surprises are devastating to high P/E stocks, but go essentially unnoticed by low P/E stocks. The result is that out of favour, low P/E stocks outperform higher P/E stocks over a longer time frame - giving phenomenal returns to the contrarian investor. 

Is a contrarian investment strategy advisable in the current market scenario? 

Contrarian investment strategies, as explained, work on the philosophy of analyst/investor errors. Analysts tend to focus on discovered stocks which leads to high valuations and hence, average returns. The present market still has enough companies which have consistent track record of growing businesses in tough environments and have established a niche space in their chosen business. 

They could be small and hence, undiscovered or they are just not in the focus area for most of the analysts in the market. Every bull market throws out new winners and it is for the contrarian investor to go look for these stocks and make the phenomenal returns that good investments usually make.

R Sreesankar, Co-Head, Equities, Prabhudas Lilladher 

Turnaround stories could be the best stocks for contrarian investment

How to identify stocks that can fit into contrarian style of investing? 
Turnaround stories could be the best ones in this. However, one needs to play the waiting game, as one may be ahead of the curve or even too early into the stock and need to bide one's time. 

What are the key traits required to become a successful contrarian investor? 
Need to understand the story well, do thorough research and then stay put. 

Why is it difficult to be a contrarian?
Will require more time in investing and waiting for the turn around to happen. It can test one's patience.

that mostly belong to the equity diversified fund category. Contra funds, as the name suggests, take a contrarian view on the equities. The investing style of the fund manager is unique as compared to the rest of the mutual fund schemes because the fund manager of any contra fund picks underperforming stocks or sectors which, in the fund manager’s view, are likely to outperform markets in the long run and are available at bargain valuations. 

Let’s say, for example, airline stocks are doing exceedingly well owing to lower crude oil prices. While most analyst will be bullish on the airline stocks as the margins are improving due to lower crude oil prices, a contra fund manager takes a “contra view” on the stock or sector by selling the airline stocks. The fund manager may hold the view that the crude oil prices may have bottomed out and the crude oil prices will inch upwards here on and hence will put margin pressure on the airline companies. Fund manager of the contra fund takes a negative view on the sector well ahead of other investors and attempts to maximise gains by booking out early. 

Says Sachin Rane, a mutual fund advisor and distributor, “Contra investing is not very popular with mutual fund investors. However, two funds are preferred by investors in this particular category viz., SBI Contra Fund and Invesco India Contra Fund.” 

Investors have less choice when it comes to picking mutual funds purely based on contrarian investing philosophy. There is some overlap in the value investing and contrarian investing philosophy and we have seen that some of the mutual fund schemes initially launched as contrarian funds have merged themselves with the other funds in the family. Some of the contra funds have merged with either the value funds or dividend yielding funds in the same mutual fund family. For e.g L&T Contra Fund has been merged with L&T India Value Fund, UTI Contra Fund has been merged with UTI Multi-Cap Fund-Regular Plan, ING Contra Fund has been merged with ING Dividend Yield Fund and Tata Contra Fund has been merged with Tata Equity Opportunity Fund. 

Investors can choose to invest in contra funds only if the risks associated with this investing philosophy is well understood. For a mutual fund investor, five to ten per cent can be allocated to contrarian investing as contra fund investing can be more risky when compared to the other categories of equity multi-cap funds. 

Contra funds can be considered for diversification benefits and only longterm investors should consider investing in these funds as there is a good probability in a bull market scenario that contra funds may underperform in the short run. Thus, it becomes extremelyimportant that investors take a three to five- year view while investing in contra funds. 

Also, investors opting for contra funds for investment should prefer a fund which has a proven track record and should avoid an NFO (new fund offer). Looking at the mandate of the fund is crucial while choosing a contra fund as the importance of the historical performance is minimal in contra fund investing.

CONCLUSION:- 

Contrarian investing is not for a part-timer, nor is it for an investor who understands equity markets superficially. Any investor who can diagnose the market trends, can think independently and is willing to wait for years together to see his or her investment grow can dabble with contrarian investing style. To go against the crowd can be rewarding once the outcome is positive. If the markets do not behave the way contrarian investor anticipated, the amount of loss can be huge. Hence, contrarian investing is not for the light-hearted investor. 

For retail investors, seeking an expert's advice is highly recommended before adopting the contrarian investing style. One of the smarter moves could be choosing to invest in mutual fund that adopts contrarian investing philosophy. If one takes a portfolio approach, not more than 10 to 15 per cent of one’s portfolio should be dedicated to the contrarian investing philosophy at the best. 

While growth investing is a must in a bull market scenario, contrarian-value investing is for all seasons.

ADF Foods 

BSE CODE 519183
Face Value Rs 10
CMP Rs 240.60
Market Cap 234.65 

ADF Foods, founded in 1932, is a Mumbai-based company engaged in manufacturing, marketing and distributing ethnic Indian food products. Its products include pickles, chutneys, ready-to-eat items, paste and sauces, frozen foods and spices under various brand names such as Truly Indian, Ashoka, Aeroplane, Camel, etc. Its distribution network is spread across Europe, the United States, the Middle East, Australia, Canada, and Asia. The company also offers contract manufacturing services. 

On the financial front, the company’s revenue rose 3.81 per cent to Rs 166.73 crore in FY17 compared to the previous fiscal. The company’s PBDT declined 13.15 per cent to Rs 26.15 crore in FY17 from Rs 30.11 crore in FY16. The company’s net profit declined from Rs 14.10 crore in FY16 to Rs 12.37 crore in FY17, registering a decline of 12.26 per cent. On a quarterly basis, ADF Foods posted 3.79 per cent increase in its revenue to Rs 41.87 crore in Q1FY18 from Rs 40.34 crore in Q1FY17. The company’s PBDT increased 1.74 per cent to Rs 7.56 crore in the first quarter of FY18 on a yearly basis. The company’s net profit rose 16.34 per cent to Rs 4.27 crore for the corresponding period. 

On the valuation front, the company is trading at a PE multiple of 38.71. Its return on capital employed stood at 7.63 per cent, whereas its return on equity stood at 6.48 per cent. The company is virtually debt-free. The company has been maintaining a healthy dividend payout of 33.47 per cent. We expect the stock price of ADF Foods to rise

Jain Irrigation 

BSE CODE 500219
Face Value Rs 2
CMP Rs 95.40
Market Cap F F (Cr.) 3,116.89 

Jain Irrigation Systems (JISL) is a renowned player in the agriculture sector, with core focus on providing micro irrigation solutions. The company manufacturers products having applications in irrigation such as drip and sprinkler irrigation systems, PVC pipes, polyethylene pipes, etc. The company has also entered in agro-processing segment under which it processes dehydrated onions, vegetables and processed fruits. The company also provides solutions for solar pumps, solar water heating systems and photovoltaic systems. JISL has 30 manufacturing plants and over 10,000 dealers and distributors across the globe.

On the financial front, Jain Irrigation posted 1.3 per cent decrease in its revenue to Rs 972.38 crore in Q1FY18 from Rs 985.84 crore in Q1FY17. The company’s PBDT increased 7.92 per cent to Rs 85.71 crore in the first quarter of FY18, as against Rs 79.42 crore in the corresponding period last year. The company’s net profit rose 16.62 per cent to Rs 40.87 crore for the corresponding period.

On an annual basis, the company’s revenue decreased 8.9 per cent to Rs 3,863.95 crore in FY17 compared to the previous fiscal. The company’s PBDT increased 36.14 per cent to Rs 384.29 crore in FY17 from Rs 282.26 crore in FY16. The company’s net profit increased tremendously from Rs 71.25 crore in FY16 to Rs 163.80 crore in FY17, registering 129 per cent increase. The stock is currently trading 1.14 times to its book value. The company has been maintaining a healthy dividend payout of 30.34 per cent. We expect the stock price to rise further.

MosChip Semiconductor 

BSE CODE 532407
Face Value Rs 2
CMP Rs 42.95
Market Cap F F (Cr.) 177.10

MosChip Semiconductor Technology Limited is an engineering solution consulting company with more than 16 years of experience in software development and designing. The company is engaged in the business of development and manufacturing of system on chip (SOC) technologies. 

It focuses on providing value-added services in very-largescale integration (VLSI) design, application specific integrated circuits (ASICs), software development and development of system on chip (SOC) for aerospace and defence, consumer and industrial applications and Internet of Things/Everything (IOT/E) products and services across various industries. The company has over 400 clients in 140 countries. 

On the financial front, MosChip Semiconductor posted 106.45 per cent increase in its revenue to Rs 3.20 crore in Q1FY18 from Rs 1.55 crore in Q1FY17. The company’s PBDT was Rs -2.50 crore in the first quarter of FY18, as against Rs 0.17 crore in the corresponding period last year. The company's net profit also decreased from Rs 0.13 crore to Rs -2.54 crore for the corresponding period. 

On an annual basis, the company’s revenue rose 227.25 per cent to Rs 16.69 crore in FY17 compared to the previous fiscal. The company’s negative PBDT decreased from Rs -10.53 crore in FY16 to Rs -0.87 crore in FY17. The company’s net loss decreased from Rs -11.18 crore in FY16 to Rs -1.03 crore in FY17. 

The company is expected to give good quarterly results going forward. Also, the promoter's stake in the company has increased. We recommend our reader-investors to BUY the stock.

KPR Mill 

BSE CODE 532889
Face Value Rs 5
CMP Rs 776
Market Cap F F (Cr.) 1,462.10

KPR Mill, established in 1984, operates as an integrated apparel manufacturing company. The company operates through three segments, namely, textile, sugar and others. It is engaged in the manufacture of cotton yarn, knitted fabric and readymade garments. The company also produces wind power and sugar. On the financial front, KPR Mill posted 6.30 per cent increase in its revenue to Rs 555.63 crore in Q1FY18 from Rs 522.69 crore in Q1FY17. The company’s PBDT stood at Rs 92.84 crore in the first quarter of FY18, which is almost same as in the corresponding period last year. The company’s net profit rose 1.85 per cent to Rs 46.17 crore during the same period. 

On an annual basis, the company’s revenue rose 13.14 per cent to Rs 2219.14 crore in FY17 compared to the previous fiscal. The company’s PBDT increased 38.30 per cent to Rs 427.74 crore in FY17 from Rs 345.20 crore in FY16. The company’s net profit increased tremendously from Rs 155.54 CMP Rs 776 crore in FY16 to Rs 238.42 crore in FY17, registering 53.85 per cent increase. On the valuation front, the company is trading at a PE multiple of 18.10 whereas its peers Arvind Ltd and SRF Ltd are trading at PE multiples of 32.94 and 25.68, respectively. Its return on capital employed stood at 20.71 per cent, while its return on equity stood at 23.98 per cent. The company has shown good and consistent profit growth of 54.59 per cent over the last five years. We recommend our reader-investors to BUY the stock.