Contrarians Should Target These Sectors

An analysis of the best sectors to target as contrarians looking for sideline money

Senior Quantitative Analyst
Aug 11, 2021 at 8:00 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 that then pushes the stock higher. Similarly, we’re bearish on stocks that have underperformed yet are loved by investors. 

Bullish Sector & Stocks

We have about 1,300 stocks grouped into 36 different sectors. To measure how their stocks are performing, the table below shows which sectors have the highest percentage of stocks trading above their 80-day moving average. To assess the sentiment toward the sectors, I aggregated the buy/sell/hold data we get from Zacks to see the percentage of analysts that rate the stocks within the sector a "buy." I also show this percentage a year ago to see if analysts are becoming more bullish or bearish on the stocks in the sectors. Finally, I have the average 52-week return for the stocks in each sector.

The Nonlife Insurance sector stands out to me, as 60% of the stocks from that sector are above the 80-day moving average. The average 52-week return of 28% is not especially impressive given it’s similar to the return of the S&P 500 Index (SPX). The analysts, however, look too bearish on these stocks. Not even half of the recommendations for the stocks in this sector are a "buy." Furthermore, the analysts have gotten more bearish over the past year.

Sectors Stocks 80-Day MA

Below are the top ten stocks in the nonlife insurance sector by 52-week return. On this list, American International Group (AIG) looks interesting. It’s up 69% year-over-year. Yet there's pessimism from the analyst community, as only four of ten (40%) analysts rate the stock a "buy." A year ago, 57% of analysts rated the stock a "buy."

Top Stocks Nonlife Insurance

Bearish Sectors & Stocks

Now let's go the other direction and look at the contrarian bearish setups. The table below shows the sectors that have the smallest percentage of their stocks above the 80-day moving average. Oil equipment has performed horribly yet a significant number of analysts still like those stocks. I’m going to focus, however, on the mining sector, which is the only sector whose average stock return is negative over the past year. The percentage of "buy" ratings on those stocks went from 64% to 68%.

Lowest Stocks Above 80Day

Here are some of the stocks from that mining sector. This would be a list to search for potential put option plays. SilverCrest Metals (SILV) and Yamana Gold (AUY) are stocks that fit the mold of poor price action but bullish sentiment. For SILV, analysts went from bullish to even more bullish. A year ago, 71% of analysts ranked the stock a "buy," and now all five analysts tracked by Zacks have a "buy" rating. AUY, which has fallen by 40% over the past 52 weeks, shows 63% of analysts rating it a "buy," up from 44% a year ago.

Mining Sector Stocks

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