The Best Sectors for Contrarian Traders

Also, three healthcare stocks that have suffered

Senior Quantitative Analyst
Oct 2, 2019 at 6:12 AM
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This week I'm going to do a basic sector analysis using our contrarian philosophy. For those unfamiliar with our contrarian approach, we look for stocks which have performed well but are despised by investors. The pessimism is an indicator of sideline money. As a stock outperforms, it starts to become clear for the bears that they have it all wrong. As they capitulate, that sideline money turns into buying power pushing the stock higher. Similarly, we're bearish on stocks that have underperformed yet are loved by investors. 

Most Bullishly Ranked Sectors

We have about 1,200 stocks broken down into 40 sectors. I created a sector ranking system that considers price action of stocks within a sector, and the sentiment on those stocks. The price action piece of the rating looks back one year, and considers the average return of the stocks and the percentage of them that have beaten the S&P 500 Index (SPX). The sentiment part of the score considers broker buy/sell recommendations from Zacks Investment Research and short interest.

The table below shows the top-rated sectors using the criteria explained above. There's no general theme I see looking at those sectors, though I see three that involve real estate (household goods & home construction, real estate investment trusts and construction & materials).

10.1 iotw chart 1

The table below shows the best stocks year-to-date from the electricity sector, the top-rated sector above. All 10 of these stocks have returned at least 20% for the year. Analysts are bullish on the top two stocks in the sector, though short-covering could boost those stocks further as they are heavily shorted.

10.1 iotw chart 2

Here's list of the best 2019 performers from the other top sectors.

10.1 iotw chart 3

Most Bearishly Ranked Sectors

Here are 10 worst sectors based on my ranking system. You know it has been a good year for stocks when only two of the 10 worst rated sectors have a negative average return, both oil related sectors.

10.1 iotw chart 4

Since listing stocks simply by the worst year-to-date returns shows mostly stocks priced in the low single-digits, the table below shows the worst stock above $25 that come from the 10 sectors listed above. I don't list the sectors, but the first three tickers in the table come from the healthcare equipment and services sectors. Twelve of the 20 stocks below come from either that sector or the pharmaceuticals and biotechnology sector. Our contrarian approach would suggest shorting stocks (or buying puts) on the poor performers that have a high percentage of analysts rating the stock a "buy," and/or stocks that have been lightly shorted. 

10.1 iotw chart 5

 

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