2 Contrarian Stock Picks With Major Upside - Schaeffer's Investment Research (2024)

As a contrarian investor, you invest against the crowd. (It's the perfect gig if you're someone who did your own thing in high school — you know who you are.) Contrarian investing means you pick up, say, shares of the foreign firm that nobody's talking about. If you let it casually slip to your buddy, "I'm investing in XYZABC," he says he's never heard of it.

Or maybe you invest in a company that's just coming out of a scandal or crisis. You might also invest in a company that has switched up its strategy or that has suffered a temporary setback, such as the loss of a major client. And that's the beauty of contrarian investing. Buying stocks of companies nobody else knows about means that they're the ones saying, "I wish I would've invested in XYZABC 10 years ago." In the meantime, you're sitting on a pile of money. A word of warning: You'll have to take a long-term view as a contrarian investor because you're waiting for the rest of the world to catch up.

Here's an example of your thought process as a contrarian investor: Let's say that the majority of investors decide that COVID-19 will wreak havoc on hospitality stocks and dump their hotel and cruise ship stocks. A contrarian investor instead buys these stocks, believing that consumer demand will increase once vaccines and boosters hit the market.

Why Contrarian Investing?

There are lots of reasons to consider contrarian investing, and one of the best reasons includes creating a considerable margin of safety relative to stocks' intrinsic values and reducing downside risk.

However, contrarian investing means that you're shuffling through company details, looking for quality companies with excellent financials, solid business strategies, products that will upend their industry (in a good way) and executives that were born to lead. You're looking for bold ideas and putting declining industries on the back burner.

Contrarian investors use lots of market research to their advantage and the biggest goal is to move your capital from overvalued positions to those that are undervalued. However, you have to invest in good companies to begin with, otherwise you won't make money. It also doesn't matter how promising a sector looks — if you can't pick a good company, you won't make money. (You'll want to know your way around a considerable number of benchmarks, such as debt-to-equity (D/E) ratio, earnings per share (EPS), price to book value (P/BV), price to earnings (P/E) ratio, P/E growth (PEG) ratio and more.)

Consider These 2 Contrarian Stocks

Ready to consider contrarian stocks? Let's take a look at three of our top picks.

Elanco Animal Health Inc. (NYSE: ELAN)

Elanco Animal Health Incorporated, of Greenfield, Indiana, is an animal health company, develops, markets and manufactures products for pets and farm animals. It creates animal parasiticide and vaccine products that protect pets from worms, fleas and ticks under the following brands: Seresto, Advantage, Advantix and Advocate. Through its Galliprant and Claro brands, the company also produces pet health therapeutics for pain, osteoarthritis, ear infections, cardiovascular and dermatology issues in cats and dogs.

It also creates vaccines, antibiotics, parasiticides and other products for use in poultry. It is also known for aquaculture production and nutritional health products such as enzymes, probiotics and prebiotics. The company also offers several Rumensin and Baytril brand vaccines, antibiotics, implants, parasiticides and other products for ruminant and swine production. The company sells its products to third-party distributors, veterinarians and farm animal producers, including beef and dairy farmers, as well as pork, poultry and aquaculture operations.

Elanco saw full-year 2021 revenue of $4,765 million, an increase of 46%. Full year 2021 earnings per share (EPS) was $0.97. Q4 2021 revenue was $1,113 million, a decline of 2%. Q4 2021 revenue increased 4%.

Here's why it's a contrarian play: The company expects seven approvals and launches and five to seven regulatory submissions in major markets.

The company expects revenue from Q1 2022 to achieve $1,200 to $1,230 million with a diluted EPS of $0.01 to $0.07 on a reported basis, or $0.33 to $0.38 on an adjusted basis.

Wells Fargo & Company (NYSE: WFC)

The fraudulent account scandal that rocked Wells Fargo also makes it a good contrarian choice. Banks should stand to do well in the wake of interest rate hikes brought to the U.S. by the Federal Reserve.

Wells Fargo & Company, headquartered in San Francisco, is a diversified financial services company. It provides banking, investment, mortgage and consumer and commercial finance products and services in the United States and internationally. Its four segments include consumer banking and lending, commercial banking, corporate and investment banking and wealth and investment management. Wells Fargo offers diversified financial products and services for consumers and small businesses, checking and savings accounts, credit and debit cards and home, auto, personal and small business lending services to private, family owned and certain public companies as well as secured lending and lease products and treasury management services. The company offers products and services to corporate, commercial real estate, government and institutional clients, including corporate banking, investment banking, treasury management, commercial real estate lending and servicing, equity and fixed income solutions, as well as sales, trading and research services.

Q4 2021 results snippets included $943 million, or $0.18 per share, net gain on the sales of corporate trust services (CTS) business and Wells Fargo Asset Management (WFAM). Net interest income decreased 1%, primarily due to the impact of lower yields on earning assets and lower loan balances.

Non-interest income increased 27%, driven by strong results in Wells Fargo's affiliated venture capital and private equity businesses and net gains from the sales of divested businesses. Investment banking fees improved on higher debt underwriting and advisory fees and card and deposit-related fees increased. Non-interest expense decreased 11%. Provision for credit losses in Q4 2021 included an $875 million decrease in the allowance for credit losses due to continued improvements in the economic environment as well as a decrease in net charge-offs.

One More Tip While You're Going Contrarian

While you're waiting for the rest of the world to catch up to your great investment, why not invest in a company that pays dividends? A dividend is a sum of money paid, usually quarterly, by a company to shareholders out of its profits or reserve money. Doing so will allow you to reap the benefits in the meantime, while you're waiting for everyone else to notice the benefits of purchasing the stock you've already procured.