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Contrarian

An Overview of the Contrarian Investment Strategy

Location of Screen: An example contrarian screen is loaded by default in the MSN Deluxe Screener

Inception: The contrarian investment strategy has been a general investment philosophy for some since the inception of the market

Created by:The contrarian strategy is a general investing philosophy as explained below and is not attributed to a specific creator.  The specific contrarian strategy run by Sum of Some was published by MSN

Contrarian investing strategy summarized

The contrarian investment strategy attempts to find out of favor stocks and avoid popular stocks.  This is not to say a contrarian investor would purchase into a company with poor fundamentals; only that they are looking for pessimism or apathy toward a sound investment.  This concept is similar to value investing, but differs because value investing focuses on companies whose fundamentals bely their share prices, whereas contrarians focus on a negative attitude from people rather than from the numbers.  On the same token, contrarians may take short positions in companies they feel are over-hyped and whose share price is now over inflated.

Creating a screen to judge public sentiment isn’t possible, so indicators based on fundamental and technical data must be used to simulate this sentiment (perhaps making this quite similar to a value investing screen afterall).

Additional Contrarian resources

Stock Screen Parameters for an Example Contrarian Investment Strategy

The below bullet points create an example Contrarian investment strategy using technical parameters that can automatically be screened.  These parameters were run using the MSN stock screener.  The text in italics explains how the parameter was defined in the screener.

1) Market Cap: Consider medium to large cap companies

Parameter: Market Capitalization >= 1,000,000,000

2) Value: Find stocks that don’t have a high Price to Earnings, which would indicate the stock may be overpriced or has high expectations from the market

Parameter: P/E Ratio: Current <= S&P 500 Average P/E Ratio: Current

3) Dividends: Find a company with generous dividends indicating a strong financial position

Parameter: Current Dividend Yield – High as Possible

4) Ratio: Find a company with a strong current ratio of assets / liabilities, again indicating a strong financial condition

Parameter: Current Ratio >= 1.5

5) Debt: Find a low debt company, again indicating a strong financial situation

Parameter: Debt to Equity Ratio <= .5

6) Margins: Find a profitable company, and one who is doing so without issuing more debt

Parameter: Pre-Tax Margin: 5-Year Average >= Industry Average Pre-Tax Margin: 5-Year Average
Parameter: Return on Equity >= ROE: 5-Year Average

7) Growth: Find a company that has been growing and is expected to continue growing

Parameter: EPS Growth Year vs Year >= S&P 500 Average EPS Growth Year vs Year
Parameter: EPS Growth Next Year >= Current Year Growth Rate