The Best Stocks and Sectors for Contrarian Traders

Bank stocks have outperformed, yet pessimism remains

Senior Quantitative Analyst
Jul 26, 2017 at 6:55 AM
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Most readers are probably familiar with our contrarian philosophy of analyzing stocks. In short, we look for stocks that move higher despite significant pessimism from the investing crowd. The uptrend, we hope, signifies stronger-than-expected technicals or fundamentals. The pessimism indicates potential buying power. Ideally, those pessimists will eventually believe they’re missing out on some big gains and buy into the stock. If the buying power is as big as we hope, the uptrend can be sustained for a long time. A similar dynamic works for finding bearish stock plays. That means looking for a stock moving lower, even though the investing crowd likes that stock.

This week, I’ll first look at which sectors stand out based on our Expectational Analysis methodology, and then list some individual stocks that are interesting from those sectors.

Bullish Stocks & Sectors 

We group stocks into about 40 different sectors, which we get from Investors Intelligence. Recall, a bullish contrarian setup is one that exhibits positive price action and negative sentiment. To measure the price action of each sector, I’m using the percentage of stocks above their 80-day moving average. To gauge sentiment, I’m looking at the analyst percentage of "buy" recommendations. I'm not only looking at the level, but also how the analysts' opinions have changed over the past year. Have they grown more bullish or more bearish?

The table below shows the sectors that have the highest percentage of their stocks above the 80-day moving average. The ones that catch my eye are the "Wall Street" and "Banks" sectors. Even though a large proportion of the stocks are above their 80-day moving average, less than half of the recommendations from analysts are "buys." Furthermore, the percentage of "buys" have decreased over the past year. Not only are analysts bearish, but they've become even more bearish.

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Here are some stocks from those sectors that might be worth a look. These stocks are doing well this year, gaining at least 10%. Also, analysts are less bearish now than they were a year ago. State Street Corp (NYSE:STT) and Bank of New York Mellon (NYSE:BK) especially stand out as having positive price action, yet the percentage of "buys" is well below 50% and significantly lower than a year ago.

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Bearish Stocks & Sectors

For the contrarian bearish setups, the table below shows the sectors that have the smallest percentage of their stocks above the 80-day moving average. The oil sector stands out since more than half the recommendations within the sector is a "buy." Also, the analysts are slightly more bullish now than a year ago.

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Drilling down on the oil sector, the table below lists stocks which are down at least 10% but analysts have become more optimistic of over the past year. More than a few stocks on this list have had terrible price action, yet analysts are far more bullish now than a year ago.

The first one on the list, SM Energy Co (NYSE:SM), stands out, with the percentage of "buy" recommendations going from 26% to 62%. ConocoPhilips (NYSE:COP) is another one where analysts have become far more bullish in the past year. However, I’m not sure which are more compelling when analyzing sentiment: the ones where analysts have become far more bullish, like the ones mentioned above, or ones where they were bullish a year ago and still are.

For example, WPX Energy Inc (NYSE:WPX) had 68% "buys" a year ago, and the analysts have stubbornly stayed optimistic on the stock, with the percentage of "buy" ratings rising to 77%. Nevertheless, these stocks fit the bill as having a negative price-action and bullish sentiment, at least when it comes to brokerage buy/sell recommendations.

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