4 Contrarian Investment Ideas To Consider

Stocks have had quite a run over the past couple of years, with the S&P 500 climbing about 60 percent since its October 2022 lows. The ascent has resulted in many stocks trading near all-time highs, but there are some that have lagged behind, creating a potential investment opportunity for contrarian investors.

A contrarian investment strategy involves purchasing investments that are out of favor at the time of purchase. Contrarian investing is closely tied to value investing because both investment strategies attempt to buy assets when they are attractively priced, which often occurs when they are unpopular in the market. 

Contrarian investors are willing to go against the prevailing view when investing in an asset class, stock or particular industry. It can sometimes feel emotionally painful to invest in contrarian ideas because the current market view may be strongly against holding a particular asset. 

But as legendary investor Warren Buffett once wrote, “You pay a very high price in the stock market for a cheery consensus.” 

4 contrarian investment ideas to consider for your portfolio

1. Value stocks

Value stocks have lagged behind growth stocks for more than a decade, but some investors think value is set up for a run of outperformance. As of the end of September 2024, the Russell 1000 Growth index has trounced the Russell 1000 Value index over the past 10 years, returning 16.5 percent annually compared to 9.2 percent for the value index. 

Value stocks, which tend to trade at lower multiples of earnings and assets, could benefit as the Federal Reserve lowers interest rates and the economy appears headed for a soft landing. Valuations for large growth stocks are far from bargain-priced, creating a potential opportunity for value stocks to shine. 

Check out Bankrate’s list of the best value ETFs. 

2. Cyclical stocks

Cyclical stocks tend to be more sensitive to how the overall economy is performing and can see their earnings fall significantly during a recession. Industries such as auto manufacturing, energy and consumer discretionary would all be considered cyclical. 

These industries have trailed the performance of the broader stock market recently. For example, the auto manufacturing industry is down about 12 percent so far in 2024, compared to a roughly 22 percent rise in the S&P 500. 

To be sure, some of these cyclical stocks face real challenges, such as the auto industry’s shift to electric vehicles as demand for EVs seems to wane. But contrarian investments rarely come without any issues to worry about. 

3. Small-cap stocks

Small-cap stocks have lagged considerably compared to large-caps in recent years. The Russell 2000 small-cap index has returned about 9.4 percent annually over the past five years through September 2024, compared to 15.6 percent for the Russell 1000 large-cap index. 

Small-cap stocks can be more cyclical than large-caps and may also rely more on external financing. Lower interest rates could benefit small-caps, and a continued strong economy may help to close the performance gap.

4. Emerging market stocks

Emerging market stocks were once viewed as a key part of a diversified portfolio. Countries like Brazil, China and India were thought to have better growth prospects than the U.S., and investors were eager to get a piece for themselves. 

But things haven’t gone according to plan, with the Vanguard Emerging Markets Stock Index Fund (VWO) returning just over 4 percent annually over the past decade. However, China’s recent steps to boost its economy could help turn the tide and set up emerging market stocks for better performance in the future. 

Bottom line

Contrarian investing can be a way to find out-of-favor investments that are attractively priced, potentially leading to strong future performance. But these areas are sometimes out of favor for a reason, so be sure to do thorough research and understand why you think the current trend will not continue. Contrarian investors aren’t rewarded just for the sake of being contrarian – they ultimately have to be correct in their investment analysis. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.