3 Contrarian Buy Ideas For July

Published in Company Comment on 3 July 2013

The only real approach I know to ensure you buy shares at cheap prices with good upside potential.

So, welcome to July. I see the weather remains dull…

…and the market remains soggy, too.

Indeed, many big-name shares have yet to rebound from June’s ‘correction’ and still trade well below their earlier highs.

So I’m now wondering whether this month could prove to be the most attractive time of 2013 to buy shares.

Certainly, I would hate for you to miss out on any large gains were the FTSE to recover suddenly and embark on another serious attempt at 7,000.

You never know, a rebound could occur as quickly as June’s falls...

…and you wouldn’t want to be sitting nervously on the sidelines then, would you?

Dazed into a deep freeze

As I’m sure you already know, sell-offs can provide rich buying opportunities for those of us prepared to go against the crowd.

And personally, I love taking a contrarian approach to investing.

I especially like to buy during times such as now…

…when everyone has been selling, or has simply been dazed into a deep freeze after watching a correction wipe 10% from their portfolio.

And I really enjoy buying shares that everybody else hates, or has written off, or has simply forgotten about…

…and building my portfolio around unfashionable shares and unloved sectors that are primed for better times and higher valuations.

In fact, just about every leading investor I can think of, including Warren Buffett, Anthony Bolton, Neil Woodford and John Lee, could be said to take a contrarian approach to their investing.

Because as far as I am concerned, it’s the only real approach I know to ensure you buy shares at cheap prices with good upside potential.

Three contrarian buy ideas for July

To show you what’s on my crowd-free radar, I’ve scoured this uncertain market for some contrarian buying ideas for July and beyond.

I focused on three main features:

  • A share price that has recently lagged the index;
  • A dividend that survived the banking crash, and;
  • A valuation that appears cheaper than the wider market.

Taking those features together, I hoped to pinpoint temporarily out-of-favour companies that have proven themselves over the long term and currently offer an attractive entry price.

I’ve come up with three suggestions.

A byword for shambles

You’ll need to be a real contrarian to consider G4S (LSE: GFS), as for the last few years the share has been a byword for shambles.

The security service specialist is, of course, best known for its Olympic contract fiasco, whereby Games organisers had to draft in the army when the company failed to recruit enough staff.

However, the firm also made an audacious £5bn bid for Danish outsourcer ISS during 2011, only to withdraw the approach two weeks later following shareholder concerns about the deal’s size.

In addition, G4S warned on margins in May this year, which lopped 12% off the share price.

Anyway, here are my stats:

  • Lagged the market by 28% during the last twelve months;
  • Dividend up 81% between 2007 and 2012;
  • Forecast P/E of 11 and projected yield of 4.2% at 230p

Everybody seems to hate this sector

Contrarians have always loved tobacco shares.

You see, ethical investors hate the sector, fervent non-smokers hate the sector…

…and doomsters who keep on predicting the industry’s demise hate the sector.

Meanwhile, the public continue puffing and tobacco companies such as Imperial Tobacco (LSE: IMT) continue to rake in the cash.

Nobody starts a new tobacco company these days, which allows Imperial to boast some pretty impressive numbers. In particular, the group’s UK business enjoys 67% margins as well as a 45% market share.

But Imperial’s recent results were mixed, with half-year profits down 5% alongside confirmation of further 10% divided hikes.

Anyway, here are my stats:

  • Lagged the market by 18% during the last twelve months;
  • Dividend up 75% between 2007 and 2012;
  • Forecast P/E of 11 and projected yield of 5.1% at £23.

Price has gone nowhere for six years

Now I wouldn’t say supermarkets are traditional contrarian investments.

But they can be seen as unfashionable at times, with Wm Morrison Supermarkets (LSE: MRW) in particular – its shares have effectively gone nowhere for six years – looking an ideal choice for those who fear the investing crowd.

As far as I can tell, the lack of market enthusiasm is down to Morrisons’ small online presence and low number of convenience stores. The recession is not helping matters either.

However, recent results were not a disaster, with profits steady and the dividend hoisted 10%.

Anyway, here are my stats:

  • Lagged the market by 15% during the last twelve months;
  • Dividend up 146% between 2008 and 2013;
  • Forecast P/E of 10 and projected yield of 5.0% at 262p.

Roughly 30% upside from the current price

Sure, you may be thinking why you should bother with such dull, slow-growth and/or problem shares right now.

Well, the dividend records of all three suggest they are fundamentally strong companies while their valuations are all more appealing than that of the wider market.

So if the clouds lift and the troubles subside, I am convinced clever contrarian Fools buying now can enjoy superior gains from all three.

Let me finish off by adding one of the trio I’ve spotlighted has just made the cut within the official Motley Fool Share Advisor portfolio.

Indeed, the smartest contrarian brains at the Fool have evaluated the company and calculated its shares have roughly 30% upside from the current price.

I think you owe it to yourself to click here and learn more about Motley Fool Share Advisor…

…and the contrarian opportunity you can buy right now to help put you on the path to long-term wealth.

Until next time, I wish you happy and profitable investing.

> Maynard does not own any shares mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

sludgesifter 03 Jul 2013 , 8:00pm

"Maynard does not own any shares mentioned in this article."
Why not? Perhaps because they are only second-best, and he's keeping quiet about the ones he really goes for.

Joyful9 04 Jul 2013 , 10:54am

Maynard is right to point out the opportunities that are opening up with the recent fall in stock markets. JEMI, an investment trust specialising in emerging markets and currently yielding 4.4% should be one to watch. See my article on this at http://thejoyfulinvestor.blogspot.co.uk/

goodlifer 04 Jul 2013 , 12:12pm

sludgesifter
"Maynard does not own any shares mentioned in this article.
"Why not? Perhaps because they are only second-best, and he's "keeping quiet about the ones he really goes for."

If Maynard were as unscrupulous as you seem to suggest, surely he'd only plug the ones he's already got?

mcturra2000 04 Jul 2013 , 12:57pm

"I would hate for you to miss out on any large gains were the FTSE to recover suddenly and embark on another serious attempt at 7,000."

Oh dear. Kiss Of Death?

giveusaquid 04 Jul 2013 , 1:14pm

If just about every leading investor takes that approach, is it still contrarian? :)

I'd hate to jump in and find the market is just taking a quick breather before diving to new depths. Luckily I have no cash spare so it's the sidelines for me anyway.

Good luck whatever you do.

richjfool 04 Jul 2013 , 2:32pm

"You never know, a rebound could occur as quickly as June’s falls...

…and you wouldn’t want to be sitting nervously on the sidelines then, would you?"

A good thought Maynard, - the rebound is now underway!!

Not so keen on your choice of stocks though.

sludgesifter 05 Jul 2013 , 9:07am

@goodlifer: I don't think it unscrupulous to plug shares you already hold, if you are content with them. It would be unscrupulous to plug shares that you regret having bought, so that you could dump them into a temporarily stronger market. There are a number of legitimate special reasons why someone might plug shares he does not own; but in general I prefer to dine where the chef eats his own cooking.

goodlifer 05 Jul 2013 , 10:59am

giveusaquid
"If just about every leading investor takes that approach, is it still contrarian?"

Yes or No.
Depends on what the common herd - the non-leading investors - get up to.
They, after all, are the majority.
Probably.

goodlifer 05 Jul 2013 , 11:30am

sludgesifter

" I don't think it unscrupulous to plug shares you already hold, if you are content with them. It would be unscrupulous to plug shares that you regret having bought, so that you could dump them into a temporarily stronger market. There are a number of legitimate special reasons why someone might plug shares he does not own; but in general I prefer to dine where the chef eats his own cooking."

What if an investment professional were to buy MRW for 2450 and go on to plug them without telling us what they cost him?
He might naturally hope that some of the great unwashed would take his advice, helping push the price up and giving him a better chance of a profitable sale.

How would you feel about that?

I seem to remember reading somewhere that Nigel Lawson had to cope with this kind of thing when he was city editor of the Telegraph, but that was long ago and probably all lies anyway.

Your analogy doesn't really hold water because the price of cookery ingredients doesn't normally fluctuate like footsie.

It's also true that I thoroughly enjoy eating my own cooking, but I doubt if you would!

giveusaquid 05 Jul 2013 , 12:10pm

True goodlifer, I couldn't tell you how much of the market is held by lead investors and their institutions, and how much is owned by individuals, there's maybe a chart somewhere, or maybe too complex and fluid to identify with any certainty. I guess any majority would comprise different elements each time depending on who decides to take and act on a view.

Sometimes I feel moved to respond, other times I'm not drawn in to any short term spin panic, although I'm certainly more twitchy about some shares than others.

vinchainsaw 05 Jul 2013 , 12:41pm

giveussquid,

Read somewhere that 95% of the market is institutional. Would make sense as most savings go into retirement pots.
With 95% institutional, and given favourable demographics, it gives the market an upside bias as pension funds are mostly fully invested.

goodlifer 05 Jul 2013 , 12:59pm

vinchainsaw
"With 95% institutional, and given favourable demographics, it gives the market an upside bias as pension funds are mostly fully invested."

Yes.
However simple or complicated - and I expect it's complicated - the explanation may be, all experience suggests that however wildly footsie fluctuates in the short run it will creep up gently in the long.

But - who knows? - this time it may be different.
The end of civilisation as we know it!

ANuvver 05 Jul 2013 , 3:10pm

Nigel Lawson at the Tel was before my time. But the City Slickers fiasco at the Mirror was red-hot when I was in the game. The pathetic thing is that the dumbass share rampers made such paltry profits. Not that I condone it, but sooner be hanged for a lamb than a thingie...

Disclosure, front-running and tip-offs in financial journalism are a very serious matter these days. Contractual terms for staffers are quite tight.

goodlifer 05 Jul 2013 , 4:59pm

"The pathetic thing is that the dumbass share rampers made such paltry profits."

Often - but unfortunately not always - true.

alarmbells 05 Jul 2013 , 6:05pm

Does Maynard own ANY shares? He certainly makes no mention of the successful shares he writes about.

Does that mean he holds a load of dogs?

Nah! He's the Fool's chief share tipster.

Funny old world, innit...

goodlifer 05 Jul 2013 , 11:37pm

giveusaquid

I can't come up with any figures either but I'm sure you're right to think that most of the market is owned by pension funds and the like.
Their managers are under constant pressure from their directors and customers to be seen to "perform," while Fools like you and me are just fleas among oxen who can't hope to impress anybody and don't need to.

In the words of the Sage "The stock market serves as a relocation center at which money is moved from the active to the patient."

And what's a fleabite to the active is banquet to the flea.

giveusaquid 09 Jul 2013 , 8:04am

vinchainsaw, that's interesting.

I had in my mind more of a 60-70% kind of figure, with the amount of fluidity needed to allow for the drastic mood swings we sometimes see, I couldn't equate that with pension funds and institutions.

I'm waiting for the day some computer whizz makes one of those point cloud animations to show real time share movements, it'll be more interesting than watching big brother.

goodlifer

I'd take more comfort from that if I didn't keep landing on the ox that was about to die :)

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