Just as buying when the market is falling can be a difficult mental feat for investors to overcome, so too can be buying poorly performing, out-of-favour stocks which you believe will do better in the future. This is exactly what the contrarian investor seeks to do. As Wikipedia puts it:
"A contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong."
The Picks
The following three stocks are certainly out-of-favour with the majority of investors. However with reasonable prospects for their respective businesses to grow earnings off current depressed levels, each stock could be substantially re-rated in the future.
Surfwear brand Billabong International's (ASX: BBG) stock has fallen a whopping 93% over the past five years to currently trade at 52 cents per share (cps). Putting that decline in context, as recently as 2010 the stock was trading near $12!
Underpinning the price fall has been a decline in profitability. In financial-year 2009 the apparel maker produced an adjusted profit after tax of $160.2 million, however in 2013 the company earned an adjusted net profit of just $7.7 million. Recent sales of parts of the business highlight that there is still value within Billabong's portfolio of brands. As the restructure progresses further, investors will get a chance to analyse the turnaround prospects of the firm, but must also keep an eye on the stretched balance sheet.
Ten Network (ASX: TEN) has experienced a fall in its share price of 72% over the past five years. Having traded near $2 in 2010 and as low as 24 cps in the past 12 months, the stock is currently trading at 32.5 cps. In comparison, in 2009 the media company delivered an adjusted profit of $47.2 million, while in 2013 Ten produced an adjusted loss of $5 million.
While the future of free-to-air (FTA) television demand and advertising revenue is still murky, it is highly likely that there will still be a FTA television industry in the future. Ten appears to be tackling these challenges head-on, which should give the company a decent chance of returning to profitability.
Like many companies with exposure to the mining services sector, Transfield Services (ASX: TSE) has fallen out-of-favour with many investors. Investor sentiment is in response to the fall in underlying profits from $123.6 million to $62.5 million over the past five years – in response its share price has dropped 51%.
While Transfield does have to deal with the slowing of the resources sector, its diversified earnings base includes asset management, property facilities and maintenance and infrastructure services across a range of regions. With a significant amount of work-in-hand and a forward order book, there is reason to assume Transfield can boost profits in the future.
Foolish takeaway
Contrarian investing is a style which certainly doesn't suit all investors. It requires nerves of steel and very patient capital, as underperformance can often continue for quite some time and dividends are often sparse during a company's turnaround.
