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
facebook X logo linkedin


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.

Iotw1chart

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.

Iotw2chart.jpg

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.

Iotw3chart

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.

Iotw4chart

 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI