There are plenty of different ways to construct a portfolio and no single way is strictly right or wrong. Rather, portfolio construction is likely to have a lot to do with the philosophy and style you employ as an investor.
For example Warren Buffett's business partner Charlie Munger always has a very high degree of conviction in his stock picks and only buys companies he considers very safe – this allows him the comfort to run a very concentrated portfolio. Munger would probably be happy owning just 10 stocks – he might even consider that to be overly diversified!
The following five stocks are all 'out-of-favour' with the market at present and while these five alone shouldn't make up your entire portfolio, allocating a portion of your overall portfolio to a selection of unloved companies can potentially boost your portfolio's returns.
Growth
Silex Systems Ltd (ASX: SLX) is an exciting company with promising prospects that investors have been waiting years to see come to fruition. Back in 2007 the stock went as high as $12.58 but today it sits closer to $2 a share. With the company currently entering Phase III of its commercialisation process, a potential step change in the company's outlook could be approaching.
Asset-backed
Treasury Wine Estates Ltd (ASX: TWE) owns many appealing wine brands including Penfolds, Wynns and Yellowglen. The company recently suffered some inventory issues in the USA, however taking a longer-term view there are reasons to be positive about this brand manager. Earnings should grow in time, particularly as Chinese consumers increase their consumption of wine, but more immediately it is nice to know that at $3.60 per share, the stock is backed by $3.26 of tangible assets.
Value
It is perhaps slightly ironic that even the "bargain retailer" Reject Shop Ltd (ASX: TRS) looks to be on sale at present after its share price crashed in late January following a profit downgrade. While a downgrade is never great news, it is possible that the issues for Reject Shop are temporary rather than permanent which could make this a great time to buy.
Contrarian/ Deep Value
As was highlighted here, there are plenty of issues facing Ten Network Holdings Limited (ASX: TEN). All of these concerns are certainly justified and it won't be smooth sailing for Ten. However it's also possible that these concerns are now more than fully reflected in the current share price and as the linked article mentioned, the domestic TV landscape would benefit from consolidation which could certainly benefit Ten too.
Foolish takeaway
Cheap shares are often cheap for a reason – so the saying goes. In each of the above cases the reasons for cheapness are clear, however there is also potential for the shares to be meaningfully higher in the future.
