Contrarian guts and glory
25 Dec 2004
The Contrarian Opportunities screen offers fabulous performance potential, and brutal risks.
Please read this first: Following is an independent investment commentary and analysis from the Reuters.com investment channel expressing views that are not connected with Reuters News.
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You asked for it. Here it is. This week I'll be focusing on the Reuters Select Contrarian Opportunities screen. I've received more e-mail asking about this screen than all the others combined. Considering its overall performance record (up more than 1,000 percent since 1/28/00, versus an S&P 500 that's still a bit lower), that's easy to understand. Here is a sense of this screen's positives and negatives.
NOTE: You can click here to download the free Excel users' console spreadsheet that accompanies this article. It contains detailed performance information about the screen, identification of which other screens or risk alert signals are applicable to each stock, and it has tools to help you prioritize among the stocks making the screen and value each one based on trends and prospects for EPS and/or Sales per share.
Screen performance
Table 1 shows the performance of the Reuters Select Contrarian screen.
Table 1
Reuters Select Screen single-month Performance Closeup
Contrarian
screen S&P 500
Total % change: 1/28/00 thru 12/17/04 +1,182.84 -12.21
Average monthly % change: 1/28/00 thru 12/17/04 +5.26 -0.11
Monthly standard deviation: 1/28/00 thru 12/17/04 13.41 4.82
Best monthly % change for screen: 12/03 +56.13 +4.75
Worst monthly % change for screen: 7/02 -16.83 -12.69
Average monthly screen % change when S&P 500 up +10.34 +3.21
Average monthly screen % change when S&P 500 down -1.39 -4.31
# months screen above S&P 500 39 - -
# months screen equal to or below S&P 500 20 - -
All stocks appearing in a screen are deemed "held" in equally-weighted portfolios for one month. On a Friday near the end of each month, the screens are re-run and "portfolios" reconstituted.
Click here to download the accompanying Excel spreadsheet console which contains much more performance detail, including assumed three-month holding periods, or here for detailed one-month performance records of all Reuters Select screens.
The good, the bad & the ugly
The good is the fact that these numbers are real. It is a sample, since for tracking purposes, I re-run the screen only once per month (even though the list is updated every day on the site). But that's the same basis upon which I track all other Reuters Select screens. And it's really the only practical approach. I don't know anybody who assumes daily portfolio turnover.
The bad is the volatility. To get the returns you see, you need the willpower to withstand some stomach-turning plunges. Over time, we see that's proven worthwhile. But if you buy the stocks just ahead of one of those periods, it's hard to stay pat since in the back of your mind, you will always wonder if this bad period is the beginning of a long ugly trend. That's the way we humans are built.
The ugly consists of the lists you'll often see. Under some market conditions, the number of names can be quite large. But lately, we've been experiencing the other extreme, when the roster is small (at times, it comes in at zero). That's just the way it is. We're looking for companies with great long-term historic track records that were just stomped on by the market. If the market won't cooperate by beating up on companies with good track records, then the screen will be largely empty. That means that often, the screen itself cannot provide you with a level of minimally acceptable diversification. So make sure that this screen does not constitute the sum total of your entire equity program. Note, too, that we often see some very small and illiquid names. Be careful about these.
Our contrarian recipe
We are not mindlessly contrarian. In other words, we don't look at a plunge and jump in for an inevitable bounce back. That's because often, stocks fall for good reason and on many occasions, there is no bounce.
What we do is look for stock declines coupled with powerful track records of above-industry-average fundamental track records. Here are the specific tests we use.
Share price, over the past four weeks, suffered a decline of more than 15% and was worse than four-week industry average share price change over that period
EPS growth must be above the industry average over the past three and five year periods
5-year average operating margin must be above the industry average
5-year average ROI must be above the industry average
5-year average return on equity must be above the industry average
The logic
This screen makes or breaks based on the notion that over time, good companies (defined by comparison with industry average) stay good.
Needless to say, this tosses us head-first into the age-old past-performance-and-future-results situation. If the future differs substantially over and over again, those who use this screen will get their heads handed to them. Fortunately for us, the world has thus far has worked in such that substantial change usually (not always but usually) happened in an evolutionary rather than revolutionary manner.
That means that even if past performance does not assure future results, it did turn out to be predictive enough to enable us to take fundamental track records seriously and give serious considerations to good companies whose shares have been beaten down. Note, though, that "serious consideration" is just that. It is not an automatic buy.
How can I find the stocks
For those unfamiliar with Reuter Select lists, start by getting to Reuters.com. Then, click on Investing Channel (in the left-side navigation menu). Next, click on Ideas & Screening.
Once in the Ideas & Screening section, you have two choices.
Click on Daily Results. Then, use the drop-down menus to get to the Value screen category and then select Contrarian Opportunities.
The alternative is to click on Reuters Select. That will produce a page that lists all Reuters Select screens. Choose Contrarian Opportunities. What you'll se next will be an explanation of the screen. A link to the latest daily list of companies is at the bottom of the page.
Scanning the list
Click here to see the most recent daily update of the complete screen.
The Contrarian Opportunities screen is notone of the eight included in the FOLIOfn subscription package that gives you direct convenient access to screens (allowing you to buy all the stocks that make the grade) with trading costs that are so modest as to be virtually irrelevant to you as an investment consideration. I omitted the screen because many of the stocks are not liquid enough to be part of that firm's special cost-advantaged window-trading system.
As to identification of individual stocks, Table 2 identifies issues recently appearing in the screen sorted based on the preferences I entered into the downloadable Excel spreadsheet console, which are as follows:
Short covering (my assigned weighting: 5)
Insider Buying (my assigned weighting: 4)
If you are inclined to give different levels of importance to these data items, or would rather consider some others, you can make adjustments and recompute the rankings on the spreadsheet.
Table 2
Contrarian Opportunities stocks
Company Industry Score
Raven Industries, Inc. (RAVN.O) Electronic Instr. & Controls 30
Brilliance China Automotive Hldg. (ADR) Auto & Truck Manufacturers (CBA.N) Auto & Truck Manufacturers 19
Mobile TeleSystems OJSC (ADR) (MBT.N) Communications Services 19
O2Micro International Ltd (OIIM.O) Electronic Instr. & Controls 9
ClearOne Communications (CLRO.PK) Communications Equipment 4
Picking and choosing
I omitted CLRO from consideration immediately. This is a very small, illiquid issue (it trades only in the "pink sheets." And the company hasn't filed financial data with the SEC since 2002. The latter for me is an absolute no-no.
In the week ahead, I'll present Company Focus articles on each of the other four. If you are seriously interested in using this screen as an idea generator, please, please, please make a pint of reading these articles.
I'm not concerned with whether you like or dislike any of these particular situations. But I do want you to get a sense of how to approach companies appearing in the screen, and want to provide examples of how I decide whether to plunge ahead with a stock or ignore the screen's performance record and reject individual issues.
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What did you think of this article? Let me know.
This article launches our bottom-up investing strategy for the week ahead: Reuters Select Contrarian Opportunities.
Also, be sure to check today's other strategy article introducing the top-down theme for the coming week: Reuters Select Retail.
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Click here for more information about the Reuters Select screens and complete daily stock listings.
Click here to see the performance record of the Reuters Select screens.
If you'd like to learn how to build your own screens or evaluate the companies produced by our Reuters Select screens, you can click here to find out about my book, "Screening the Market: A Four-Step Method to Find, Analyze, Buy and Sell Stocks." To learn more about finding and analyzing value-oriented stocks, click here to find out about my newest book, "The Value Connection: A Four-Step Market Screening Method to Match Good Companies with Good Stocks."
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