You need conviction in your bets and a stop-loss as a defence mechanism to curtail losses
Parag Parikh of Parag Parikh Financial Advisory Services (PPFAS) defines a contra call like this: "When a good company's share price falls, investors stay away for fear of loss. A true contrarian will find the latter attractive because he might get a good business for cheap."
Sanjay Bakshi, investor and a professor at MDI, Gurgaon, says, "To me, contrarian investing is not about betting against the crowd. It's about having an independent mind." He quotes Benjamin Graham, who had said, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data is right and because your reasoning is right."
Both agree that going against the trend doesn't mean that an investor simply buys something that the crowd is not interested in. "That's a foolish way. It's like driving on the wrong side of the road, which will eventually cause an accident," says Bakshi.
Experts point out that during the bull period of 1998-2000, investors went for dotcom stocks. A large number of 'old economy' sectors such as heavy engineering, auto, and refineries were overlooked. These became available at attractive valuations from a medium-term perspective, says Ajay Bodke, head, investment strategy & advisory, at Prabhudas Lilladher. When the dotcom bubble burst, those with a contrarian view - investors in old economy stocks - were able to tide the downturn better.
Similarly, in the current environment, information technology, pharma and multinational companies are flavour of the season, says S P Tulsian, an investment advisor. Take the example of pharma stocks. Among 10 companies that form the National Stock Exchange's CNX Pharma index, eight are close to their 52-week high. While the Nifty was down 4.14 per cent in the past month, the pharma index returned 9.25 per cent.
Contrarian calls exist in all market conditions, especially when markets make new highs, as we have seen in the past few weeks. Here are some sectors and asset classes that experts feel have potential but are currently overlooked.
Public sector banks
Most public sector bank (PSB) stocks, which are beaten down or have underperformed the broader market over the past few years, could witness a reversal in fortunes. As of today, investors are concerned about the high stress on their asset quality, weak capitalisation, and slowing credit offtake. In the past month, when the Nifty fell 4.14 per cent, the CNX PSU Bank Index returned -9.04 per cent. This may change as the economy picks up and the credit cycle reverses. But the process is going to be gradual.
The realty sector, which was the darling of markets in 2007, is out of flavour since the markets corrected a year later. "That's because most large real estate companies have been huge value destroyers and some have indulged in fraud," says Bakshi. The numbers speak for themselves. In the past five years, the Sensex went up 62.30 per cent, while the CNX Realty Index is down 47.06 per cent. Many investors continue to stay away, as they think the sector is yet to mature and also because of lack of transparency. The rightly deserved taint of the industry, however, is wrongly applied to some good companies in this space. Experts said these well-managed companies could turn out to be good bets.
The stocks of these companies saw the same rise and fall that the realty index did - these too were investors' favourite in 2007 and now ignored due to issues plaguing the sector. Many power projects are stuck due to shortfall of raw materials such as coal and gas. Some companies are awaiting revision in tariffs. This has impacted the financial performance of companies. As a result, stocks of these companies have continued to underperform the broader index. In the past month, the S&P BSE India Power Index is down 7.14 per cent, almost double of the Nifty. The five-year return of the index is -31.27 per cent, while the BSE Sensex posted 59.73 per cent gains.
Experts feel there are some companies in the pack that are currently undervalued. On an economic recovery, these could see a turnaround as the fortunes of these sectors are linked to the performance of the economy.
Too many factors affect companies in this space. They are impacted by the country's economic performance as well as global demand. In the past few years, these companies have underperformed due to global overcapacity, subdued domestic demand, decreasing prices, rising input costs and delays in obtaining procedural clearances for mines. Of the 14 companies in NSE's CNX Metal Index, four are trading close to their 52-week lows.
Experts believe that the fall in share prices have made some companies attractive buys and they have captive assets, strong visibility on earnings growth over the coming few years, and are not highly leveraged.
This is an asset class that most people have completely deserted when equities started picking up. Many believe that there is a negative correlation between equities and gold prices. Since the beginning of the calendar year, assets in gold exchange-traded funds have dipped to their lowest levels since July 2011, according to reports. "People forget that gold is an essential part of a portfolio. Other than the physical gold that an investor may own, the metal needs to be 15-20 per cent of the entire portfolio for stability," said Rajiv Shastri, MD and CEO, Peerless Mutual Fund. He thinks that gold is a "great" contrarian bet in the current environment and cites an old saying that goes 'the actual bull market starts when the last bull loses hope'. The same thing can happen with gold.
Experts advise investors shouldn't go overboard with contrarian bets and skew their portfolio with companies in specific sectors alone. The equity portfolio needs to be diversified across sectors. Therefore, they could cap the sector exposure at 20 per cent of the portfolio. Another trick is putting a stop-loss on your stocks to protect you from downside risks.
"Making mistakes is fine. Perpetuating these is not. An investor needs a system that will help him or her recognise mistakes early and correct these," says Bakshi.
The original article could be seen here.