Apple & energy stocks remain cheap
116 of the stocks in the S&P 500 (^GSPC) have hit 52-week highs in the past two days, according to MarketWatch. Rather than chase the winners, Patrick O’Shaughnessy of O’Shaughnessy Asset Management tells us the bigger payoff will come from buying the losers, a strategy known as contrarian investing. “If all you did was buy the scariest 25 stocks for the past 50 years you would have outperformed the market by about 5% per year.”
Among the scariest stocks right now, based on O’Shaughnessy’s research, are select commodity stocks. “Energy stocks are definitely rising to the top of the contrarian pile.” The Energy Select Sector ETF (XLE) is little changed this year. While the United States Oil ETF (USO) has dropped over 20%, falling in tandem with the price of WTI crude, now sitting at $74 a barrel. With OPEC set to meet on November 27 investors remain uneasy about the sector.
Contrarian stocks can also be found among “old world technology” companies, says O’Shaughnessy, such as hard disk drive maker Seagate Technology (STX). “Everyone thought hard drives were going to be a thing of the past with cloud computing and has hated that stock for the past five years.” As an example of O’Shaughnessy’s contrarian strategy, Seagate shares have advanced nearly 300% during that period.
One surprising name on his list: Apple (AAPL). Even though its market cap hit $700B this week and shares have nearly doubled this year, O’Shaughnessy notes its valuation is still reasonable, and that is a key component of contrarian investing. Apple trades at a price to earnings ratio of 18, in line with the S&P 500 (^GSPC).
Even though U.S. stocks continue to make new highs, there are always contrarian values to be found, he says. “You can be a contrarian in the stock market and still be long. The key is to look for cheap valuations.”
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