Contrarian stocks - how going against the crowd can put you ahead

Friday, Nov 06 2015 by
Contrarian stocks  how going against the crowd can put you ahead

When market valuations fell sharply this summer, Neil Woodford, the highly respected fund manager, described how sliding share prices can be overwhelming and distort rational perspectives. He said that while it can be difficult to remain focused on fundamentals when markets fall dramatically, it’s a chance to look for opportunities where the falls have been heaviest.

In essence, Woodford was saying that good quality companies don’t necessarily stop being good when their share prices fall. In fact, lower prices can be a blessing to a strategy that combines two of the most influential drivers of investment returns: Quality & Value.

It’s a strategy that has earned Woodford a reputation as a star fund manager. And it’s one that’s been executed with devastating success by some of the investing world’s best known names, ranging from David Dreman and Joel Greenblatt to Warren Buffett. The philosophy was best summed up by Greenblatt in The Little Book that Beats the Market  “buying good businesses at bargain prices is the secret to making lots of money.”

Why Quality + Value is effective


In the taxonomy of stock market winners, Quality + Value (QV) stocks are cast as the market’s Contrarians. These are the shares for value investors who don’t get hung up about positive momentum. Often they don't have an improving price trend, which turnaround investors use to find value stocks that are on the mend. But equally, Contrarian plays are less likely to be the deeply discounted shares with no quality and no momentum, that can end up being value traps (which we covered here).

Instead, Contrarian plays need investors to be sanguine about market sentiment and concentrate on buying quality at a reasonable price. As Warren Buffett termed it: “Whether socks or stocks, I like buying quality merchandise when it is marked down.”


The appeal of this approach is that it introduces an important safety factor to value methods that simply focus on degrees of cheapness. One researcher that has looked closely at this is Robert Novy-Marx, an assistant professor of finance at the University of Rochester in New York. He has written that there is a strong philosophical connection between quality and value: 

“Quality can even be viewed as…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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6 Comments on this Article show/hide all

brucepackard 6th Nov '15 1 of 6

Cenkos? HomeRetail? Miners and energy companies like Ferrexpo!!!! I think this shows the importance of using the screen with an overlay of common sense. As you say. Shares might be the wrong price, and they go up. BUT no one would suggest are "quality" companies, because they operate in very cyclical industries or are structurally challenged.

Good article though. Just would be careful about suggesting the list represents "quality".

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ijh9547 13th Nov '15 2 of 6

Thanks for the opportunity to read through it; still feeling my way and trying to learn more about stocks and bonds

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thos 14th Nov '15 3 of 6

QV shows shares with either high V or high Q. Intuitively a pick should have both high V and high Q. It would be interesting to see whether adding Q>70 and V>70 would improve backtested results.

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Bearbull 12th Dec '15 4 of 6

In my opinion this article should end with the Steve-O Video warning:
“Don’t try this at home because I am a professional”.
Please be warned – this kind of strategy is really only for those with a very very strong stomach! Most of the time QV shares dive another 20 to 30% before they find something like a shaky final bottom. Yes, if you were so convinced that Daimler makes the best cars in the world anytime during the Chrysler Agamemnon you could have made good money "by now". But first you would have gone 30% under water and "by now your men are dead" (Matrix) :-)

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herbie47 12th Dec '15 5 of 6

Good performance by the fund although Terry Smith is another fund manager who invests heavily in Tobacco.

Looking at your list, I know Record although I never invested, I think the quality and risk ratings are wrong on Stockopedia and I would consider this quite high risk, a few months ago they had problems. Cenkos was nomad for Quindell, so depends if there is any action taken against them. Home looks like a reasonable value investment if company structure changes, such as they sell off Homebase.

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larksrise 10th Jun '17 6 of 6

In reply to post #110829

As it turned out Ferrexpo would have been a very good buy back in Nov 15 - Cenkos, Home Retail less so....

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Ben Hobson

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