Thematic | Contrarian Investing
Please refer our report dated
23 June 2017
Contrarian Investing – Quarterly Update
A review of our contrarian investment strategies
Our thematic strategy note on
published in June 2017 gives a
detailed account of the subject matter. In this note, we have reviewed the
performance of our strategies. Also, since we use quarterly rebalancing to test our
hypothesis, we have run the updated quintiles as on December 31, 2017 and
present key findings along with our top contrarian bets.
Key takeaways from 3QFY18 quintiles
Please refer our report dated
23 August 2017
Our analysis suggested that, over a longer term, neutral to moderately popular
stocks deliver significant outperformance, even bettering the performance of
the most popular stocks.
In this quarter, neutral to moderately popular stocks as
well as the most popular stocks failed to beat the benchmark. The most popular
stocks delivered the worst return in this quarter, whereas the least popular
stocks performed the best.
Our findings proved that, over the long term, out-of-favor low P/E stocks deliver
disproportionate returns, significantly beating the benchmark. In contrast, the
performance of high P/E stocks is dismal.
In this quarter, high P/E stocks
delivered the best returns, whereas the low P/E quintile failed to beat the
Similarly, out-of-favor low P/CF stocks deliver disproportionate returns,
significantly beating the benchmark. In contrast, the performance of high P/CF
stocks is dismal.
In this quarter, low P/CF stocks delivered the 2
whereas the high P/CF quintile performed the worst.
We also note that in some sub-themes, the returns from a quintile deviate from
the long-term pattern highlighted in our initial detailed note. However, this is in
line with the trends observed even in the long-term study – where returns can
deviate for a quarter here and there but over a long period, the hypothesis is
proven right. For example, in the Popularity theme, instead of Quintile-4,
Quintile-5 has delivered the best returns in 3QFY18. Quintile-5 is the worst
performing quintile over the last decade.
Best delta: Consensus change from net sell to net buy
As a part of our analysis, we
have divided BSE100 in 5
groups of 20 – Quintile-1
(Q1), Quintile-2 (Q2),
Quintile-3 (Q3), Quintile-4
(Q4) and Quintile-5 (Q5),
respectively, with Q1 being
composed of the most
popular stocks and so on
Top contrarian picks
Our findings suggested that a simple strategy of investing in stocks for which
analyst consensus has changed from “net sell to net buy” with a holding period
of one year has delivered 24.1% annual returns over the last 10 years.
Net Sell to Net Buy stocks for 3QFY18: Stocks that satisfy this criterion for
3QFY18 are – Jet Airways, Marico, PNB, United Spirits, and Dr Reddy’s.
We highlight our top contrarian Buy and Sell picks based on the various themes we
have covered in this note as well as in the past –
Popularity, Relative Valuations,
Net Sell to Net Buy, Consensus Sells.
Contrarian BUYs: Lupin, Hero Motors, Nestle, HPCL, Sun Pharma
Contrarian SELLs: KMB, Ultratech Cement, JSTL, GAIL and Bajaj Finance
Gautam Duggad – Research analyst
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Bharat Arora – Research analyst
(Bharat.Arora@MotilalOswal.com); +91 22 3982 5410
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.