4 contrarian investment ideas to consider for your portfolio

Stocks have enjoyed quite a run in recent years, with the S&P 500 up around 60 percent since its October 2022 lows. The rise has left many stocks trading near all-time highs, but some have lagged, presenting a potential investment opportunity for controversial investors.

A contrarian investment strategy involves purchasing investments that are out of favor at the time of purchase. Contrarian investing is closely related to value investing because both investment strategies attempt to purchase assets at an attractive price, which is often the case when they are unpopular in the market.

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

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

4 contrarian investment ideas to consider for your portfolio

1. Value stocks

Value stocks have underperformed growth stocks for more than a decade, but some investors believe value stocks are primed for an outperformance streak. As of the end of September 2024, the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index over the past 10 years, producing an annual return of 16.5 percent, compared to 9.2 percent for the Value Index.

Value stocks, which tend to trade at lower earnings and asset ratios, could benefit if the Federal Reserve cuts interest rates and the economy appears headed for a soft landing. Valuations of big growth stocks are far from cheap, 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 overall economic trends and can see a significant decline in earnings during a recession. Sectors such as automotive, energy and consumer discretionary would all be considered cyclical.

These industries have underperformed the broader stock market recently. For example, the automotive industry is down about 12 percent so far in 2024, compared to an increase of about 22 percent for the S&P 500.

Of course, some of these cyclical stocks face real challenges, such as the automotive industry’s transition to electric vehicles as demand for electric vehicles appears to be waning. But contrarian investing rarely comes without problems to worry about.

3. Small-cap stocks

Small-cap stocks have significantly underperformed large-cap stocks in recent years. The Russell 2000 small-cap index returned about 9.4 percent annually over the five years ended September 2024, compared to 15.6 percent for the Russell 1000 large-cap index.

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

4. Emerging market stocks

Emerging market stocks used to be considered an important part of a diversified portfolio. Countries like Brazil, China and India were thought to have better growth prospects than the US, and investors were eager to get a piece of it.

But things didn’t go according to plan: The Vanguard Emerging Markets Stock Index Fund (VWO) achieved an annual return of just over 4 percent over the last decade. However, China’s recent moves to boost its economy could help turn the tide and set up emerging market stocks for better future performance.

Conclusion

Contrarian investing can be a way to find unpopular investments at attractive prices that may lead to strong future performance. But these areas sometimes fall out of favor for a reason. Therefore, make sure you do thorough research and understand why you believe the current trend will not continue. Controversial investors aren’t just rewarded for being contrarian – they ultimately have to be right in their investment analysis.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making any investment decision. In addition, investors should note that the past performance of an investment product does not guarantee future price increases.