People often talk about contrarian investing as being analogous to value investing. After all, isn’t contrarian investing about buying shares which are cheap, oversold and unloved? And if a share is cheap, isn’t it, by definition, a value share?
Well, to that I would say: sometimes, but not always.
What is the definition of contrarian investing? Well, it is, quite simply, going against the crowd. That’s all. So a contrarian investment can be a value share, or a growth share.
Lloyds Banking Group
Take the example of Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US). This is undoubtedly a contrarian investment. Since the Credit Crunch, bank shares have fallen under the weight of billions upon billions of pounds of bad debt. And the banks were further pummelled by wave after wave of negative publicity, from the PPI scandal, to LIBOR and money laundering. This is about as contrarian as you can be.
Now look at the earnings per share in recent years, and forecast EPS:
2011: -4.10p, 2012: -2.00p, 2013: +5.28p, 2014: +6.76p, 2015: +8.38p
The trend is clear. And the rate of recovery of earnings is astonishing. From making multi-billion pound losses, the business is now making multi-billion pound profits that are growing at a rate of knots. This is the earnings progression not of a slowly recovering value share, but of a high-growth company. Yet the 2014 P/E ratio is just 12. So you are buying a high-growth blue chip at a P/E ratio below the market average. This is contrarian investing as growth investing.
Barratt Developments
Now take the example of Barratt Developments (LSE: BDEV). The housing market, after booming like never before, fell crashing down during the Great Recession. After peaking at over 1200p in 2007, Barratt’s share price fell to around 50p. No-one would touch the shares with a bargepole. People were talking about the housing market being moribund for years. But this past year has seen house prices and the number of house purchases surge, along with housebuilder profits.
The EPS numbers tell the story:
2011: -1.40p, 2012: +6.90p, 2013: +7.50p, 2014: +27.54p, 2015: +37.70p
If Lloyds’ turnaround was fast, Barratt’s resurgence has been even more dramatic. From 2013 to 2014, profits are expected to quadruple, and then increase again in 2015. This is a progression in profitability that would put high growth companies like ARM and ASOS to shame. Yet Barratt Developments’ 2014 P/E ratio is only 16.
If you had invested in Lloyds or Barratts at the bottom, you would already have multi-bagged. And I expect the share prices of these firms to increase much more into the future. This is contrarian investing. And it is also growth investing.