2 Sectors Contrarian Traders Should Target

Many personal goods stocks are unloved by analysts

Senior Quantitative Analyst
Aug 8, 2018 at 7:19 AM
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This week we'll do a quick sector analysis using our contrarian philosophy. For those unfamiliar with our contrarian approach, we look for stocks that have performed well, but are despised by investors. That pessimism is an indicator of sideline money. As a stock outperforms, it gets harder and harder for those bears to resist. As they capitulate, that sideline money turns into buying power, pushing the stock higher. Conversely, we’re bearish on stocks that have underperformed yet are loved by investors. 

The Most Bullish Sectors

We run numbers on about 2,300 stocks broken down into about 40 sectors. I created a sector ranking system that considers price action of stocks within a sector, and also the sentiment on those stocks. The price action piece of the rating looks back one year and takes into account the average return of the stocks and the percentage of them that have beaten the S&P 500 Index. The sentiment part of the score considers broker buy/sell recommendations from Zack's Investment Research and short interest.

The table below shows the top-rated sectors using the criteria explained above. Looking at those sectors, it seems there’s little brokerage confidence in consumers. A lot of the sectors seem to rely on discretionary spending, such as personal goods, leisure goods, retailers, travel & leisure, etc.

Top Rated Sectors

The table below shows the best stocks year-to-date in the personal goods sector, the top-rated sector above. All ten of these stocks have returned at least 20% for the year. Only two of them, however, have more than half of the analysts in coverage rating them a buy. This could be an indicator that pessimism remains on the stock and, therefore, ample sideline cash exists.

     Personal Goods Sector

The Most Bearishly Ranked Sectors

Here are the 10 worst sectors based on my ranking system. The mining sector struggles are linked to gold and other commodity prices. There are only nine stocks in the beverages sector and the mobile telecom sector (the average return in the mobile telecom sector is boosted by one stock, Intelsat SA (I), which has returned over 500% year-to-date). To me, the auto sector was the most interesting part of the chart below.

Worst Rated Sectors

Here are the worst stocks, year-to-date, from the automobile & parts sector. All of these stocks are negative on the year. Some of them have very bearish sentiment already. The two that stand out as having done poorly but most analysts still recommend buying are LKQ Corporation (LKQ) and General Motors (GM). Downgrades on these stocks could pressure their shares even lower.  

Automobiles and Parts Sector



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