Is it Time to Get Contrarian?

The second half of 2019 is setting up nicely for contrarian investors. On July 31, Federal Reserve Chair Jerome Powell spooked the markets by suggesting that day’s quarter-point interest rate cut by the Federal Open Market Committee (FOMC) may be the last one this year.

Read This Story: The Fed Cuts Rates… But Stocks Plunge Anyway

If so, we may see a reversal in the relative performance of many sectors versus the first half of the year when multiple rate cuts were a foregone conclusion. That means an entirely different set of stocks may rule over the remainder of 2019. For investors, that spells opportunity if you have the courage to act now before everyone else catches on.

First, let’s take a look at what happened over the first seven months of the year. Information Technology was the top-performing sector with a 30.2% return.

The worst performing sector was Health Care with a modest 5.3% gain. Only one other sector—Energy—posted a single-digit increase of 9.1%. All other sectors delivered gains in the 12% – 22% range.

The S&P 500 Index was up 18.9% thru July, nearly twice its long-term average annual return of roughly 10%. No matter how you measure it, the first half of this year could not have turned out much better for the stock market.

Change in Direction

The unsettling message delivered by Powell may change the complexion of the stock market over the next five months. If no more rate cuts are forthcoming, many Wall Street analysts will be revising their discounted cash flow (DCF) models accordingly.

That would penalize high-multiple momentum stocks the most since their future earnings would be discounted at a higher rate than originally assumed. At the same time, low-multiple value stocks that pay high cash dividends would benefit the most from such a revision.

If that scenario plays out, compiling a short list of likely winners is not difficult.

  • First, take a look at the three worst performing sectors during the first half of the year: Health Care, Energy, and Utilities.
  • Next, identify individual stocks in each of those sectors that pay a dividend greater than the current yield of the 30-year Treasury bond (2.5%).
  • Lastly, limit your search to those trading at an forward price-to-earnings ratio (FPER) of less than 13 (roughly two-thirds of the multiple for the S&P 500 index).

Here are a couple of names that caught my eye from each of those sectors with their recent share price, forward dividend yield, and FPER multiple:


Amgen (NSDQ: AMGN) – $185/3.1%/12.4x

AbbVie (NYSE: ABBV) – $65/6.4%/6.9x


Marathon Petroleum (NYSE: MPC) – $55/3.8%/7.3x

Royal Dutch Shell (NYSE: RDS-A, RDS-B) – $59/6.0$/9.2x


The AES Corp. (NYSE: AES) – $17/3.2%/12x

PPL Corp. (NYSE: PPL) – $29/5.6%/11.8x

To be sure, it would take guts to buy this group of stock right now. Half of them posted negative returns over the first half of 2019. But that’s the point of contrarian investing.

Legendary investor Warren Buffett is famous for stating: “Be fearful when others are greedy and greedy when others are fearful.” He was referring to the overall stock market, but the same principle holds true for individual stocks.

Six months ago, I urged investors to buy several beaten up value stocks including Xerox (NYSE: XRX) after it dipped below $20. Four months later XRX was trading above $35 for a 75% profit.

I also recommended buying credit card issuer Discover Financial Services (NYSE: DFS), which ended July with a stunning 54% gain so far this year. Also on that list was chipmaker Western Digital (NSDQ: WDC), up 49% over the past seven months after getting hammered last year.

To be clear, I’m not expecting gains of that magnitude out of the six stocks listed above. But as these examples prove, the stock market doesn’t always get it right.

In fact, my colleague Jimmy Butts has devised a contrarian system to consistently, and legally, beat Wall Street at its own game.

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