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Contrarian Investing – Quarterly Update
A review of our contrarian investment strategies
Our thematic strategy note on Contrarian Investing, published in Jun’17, gives a detailed account of the subject matter. In this note, we have reviewed the performance of our strategies. Also, since we use quarterly rebalancing to test our hypothesis, we have run the updated quintiles as on 30th Jun’19 and present our key findings along with our top contrarian bets.
Key takeaways from 1QFY20 quintiles
* Our analysis suggests that, over a longer term, neutral-to-moderately popular stocks deliver a significant outperformance, even bettering the performance of the most popular stocks. In 1QFY20, the most popular stocks performed the best, beating the benchmark, whereas the neutral to moderately popular stocks delivered the third best return.
* Our findings prove that, over the long term, out-of-favor low P/E stocks deliver disproportionate returns, significantly beating the benchmark. In 1QFY20, high P/E stocks performed the best, whereas low-P/E stocks came in second.
* Similarly, out-of-favor low P/CF stocks deliver disproportionate returns, significantly beating the benchmark. In contrast, the performance of high P/CF stocks is dismal. In 1QFY20, low P/CF stocks delivered the best returns, whereas high P/CF stocks delivered the second best returns.
* 1QFY20 was characterized by the decent performance of the value quintiles (low P/E, low P/B delivered second best returns, whereas low PCF came in first).
* We also note that in some sub-themes, the returns from a quintile deviate from the long-term pattern, as highlighted in our initial detailed note. However, this is in line with the trends observed even in the long-term study – where returns can deviate for a quarter or two, but over the long period, the hypothesis is proven right. For example, in the Popularity theme, instead of Quintile-4, Quintile-1 has delivered the best returns in 1QFY20.
Best delta: Consensus change from Net Sell to Net Buy
* Our findings suggest that a simple strategy of investing in stocks for which analyst consensus has changed from ‘Net Sell to Net Buy’ with a holding period of one year has delivered 21.1% annual returns over the last 12 years.
* Net Sell to Net Buy stocks for 1QFY20: There were no stocks that satisfy this criterion for this quarter.
* Exit from list: United Spirits and ABB have exited our list after completing 12 months. These stocks entered from ‘Net Sell to Net Buy’ in May’18 and delivered (17.2%) and 27.8% returns in a year.
Top contrarian picks
We highlight our top contrarian Buy and Sell picks based on the various themes we have covered in this note as well as in the past – Popularity, Relative Valuations, Net Sell to Net Buy, Consensus Sells. Contrarian BUYs: Bank of Baroda, Siemens, NTPC, NMDC and ITC Contrarian SELLs: Asian Paints, Havells, Britannia, Shree Cement and Cipla
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