More opportunities for contrarian investors

27 March 2020

The current state of market offers great opportunities for contrarian investors and those with a firm focus on the fundamentals since the gap between defensive stocks, such as healthcare, real estate investment trusts (REITs), utilities and cyclical stocks such as materials, energy and banks, had never been wider, according to Allan Gray’s chief investment officer Simon Mawhinney.

This is a truly contrarian investor’s market and one which would reap dividends for investors with a firm focus on the fundamentals, he said.

“Benefitting from mispricing opportunities such as we are seeing currently, requires a long-term perspective, a contrarian approach and a recognition that the future is far less predictable and certain than consensus would have one believe.

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“Market uncertainty has an uncanny way of presenting the greatest opportunities for contrarian investors.”

According to Mawhinney, recent issues such as bushfires and now COVID-19 showed how difficult it was to know what the next important catalyst may be. 

“It is even more important, when assessing the value of assets, that you buy them for much less than they are worth. This approach is the contrarian investor’s best weapon,” he stressed.

To further prove it, Mawhinney looked at biotech company CSL as an example of potential market mispricing and pointed out that only three companies had grown earnings at 10% per annum for 20 years on the Australian Securities Exchange (ASX) with CSL being one, but more importantly market expected that CSL would able to continue to grow earnings all over again for the next 20 years.

“At current pricing, CSL has a market capitalisation of $130 billion while the combined market capitalisation of ANZ and NAB is almost $50 billion less than CSL,” he said.

“Yet the combined banks’ consensus earnings forecasts of $12 billion is more than three times that of CSL, and at consensus growth rate expectations it would take almost 20 years for CSL to catch up to the combined earnings of the two banks.”

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