A Contrarian Approach to Breaking Down Sector Performance

Food & drug retail sectors seem to be performing best during this quarantine-addled time

Senior Quantitative Analyst
Apr 8, 2020 at 7:30 AM
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Six months ago, I wrote an article presenting an overview of sectors using contrarian analysis, which is popular here at Schaeffer’s Investment Research. Here’s an understatement: a lot has changed since then. So this week, I’m going to do a similar analysis to see which sectors look attractive/unattractive based on our contrarian philosophy.

Recall, our contrarian approach involves finding stocks that have performed well but are looked down upon by the investing community. If the stock continues to outperform, it becomes harder for the bears to hang on to their beliefs. That pessimism indicates a lot of sideline money and potential buying power. If a lot of bears capitulate at once, it can lead to an intense spike in the stock price. Similarly, we’re bearish on stocks that have underperformed yet are loved by investors. 

Most Bullish Ranked Sectors

We have about 1,100 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 10 sectors. Six months ago, the electricity sector headed the list, but is now ranked ninth. Topping the list now is the food & drug retailers sector, which could be one of the few sectors benefiting from the coronavirus as they are the only kind of retail shops allowed open in many states. That sector, along with alternative energy, second on the list, was in the top 10 last October.

Top Rated Sectors_1

Below are the top 10 stocks in the food & drug retailers sector by year-to-date return. Kroger (KR), third on the list, has surely seen an uptick in sales due to the virus. Sales increased 30% in March compared to the year before. It’s up 8% on the year but only 44% of the analysts rate it a buy.

Top YTD Returns Food & Drug Retailers Sector_2

Here’s a list of stocks from the next three top rated sectors on the list. The sectors include alternative energy, food producers and industrial transportation. It’s all the stocks that are up on the year or down less than 10% on the year from those sectors. Notice anything? Enphase Energy (ENPH) and Solaredge (SEDG) are alternative energy companies, while C.H. Robinson Worldwide (CHRW) is an industrial transportation company. You see, the list is otherwise dominated by food companies.

Top YTD Returns Other Top Sectors_3

Most Bearish Ranked Sectors

Here are the 10 worst sectors based on my ranking system. Oil has been crushed this year during the Saudi Arabia and Russia oil price war. Oil-based sectors are third and fourth on the list. The worst sectors based on my contrarian methodology, however, are media companies and construction & materials.

Worst Rated Sectors_4

Simply looking at the worst yearly performers gives a lot of low-dollar stocks. Therefore, considering only stocks priced above $20 from the media or construction & materials sectors, below are the stocks down at least 20% on the year.

Worst YTD Returns Media and Construction & Materials_5


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