10 FTSE 250 shares for brave contrarians

The UK stockmarket rallied hard after last year's EU referendum. Weaker sterling, stronger commodity prices and a decent economic outlook all pushed prices higher. But one index that was much slower to react was the FTSE 250, which is traditionally seen as the pulse of the domestic economy.

But that's all changed in 2017, and the mid-cap index is now hitting new highs. Even so, many of its constituents remain deeply out of favour, making them potentially ideal hunting ground for brave contrarians.

The making of a contrarian

If you'd followed Warren Buffett's advice of being greedy when others are fearful, you could have netted big gains in the worrying weeks after the Brexit vote. You could have pocketed even more if you were brave enough to pick up stocks in the rock-bottom years after the dotcom crash or the financial crisis. On these occasions, shares were deeply unpopular, leaving shattered investors on the sidelines just as prices rebounded.

Even in upbeat conditions, some stocks and sectors fall out of favour with most investors. Right now, uncertainty over Brexit negotiations, rising input prices and pressure on earnings in some sectors is rattling parts of the market. There is simply a shroud of uncertainty over some UK stocks. They've become no-go zones to all but the steeliest value hunters.

These value hunters are the contrarians. They're prepared to look beyond market sentiment in the search of quality stocks that have been mispriced. Going against the herd is simple enough to understand, but it's a discipline completely at odds with how most of us are wired up.

David Dreman, a US fund manager and highly regarded value investor, is a classic contrarian. He insists that the strategy is worth the wait and that the re-evaluation process, which is heavily influenced by investor behaviour, is the key to large and consistent profits in the market.

He wrote: "As long as investors believe they can pinpoint the future of favored and out-of-favor stocks, you should be able to make good returns on contrarian strategies."

Screening the market

In practice, contrarian investing means looking for stocks that are priced too cheaply against their underlying value. Often, these companies will have a sense of uncertainty about them and their share prices will have been under pressure.

To make this easier, at Stockopedia we measure and rank every stock in the market based on their quality, value and momentum - scoring each from zero (poor) to 100 (excellent). All three factors are calculated using a range of the most financial measures and metrics.

By focusing on good quality, cheaply priced stocks with poor momentum, it's possible to begin searching for shares that may fit with a contrarian strategy.

By the way, you don't need to use this kind of ranking. Contrarianism is simply about spotting good companies that may have been unfairly marked down by the market.

Leading the list is Wizz Air, the airline whose shares were pummelled after the EU vote and produced a profit warning earlier this month. There is no doubting that airline shares can be painful for investors, so the question for contrarians is whether Wizz Air can turn things around.

The same goes for Pets at Home, which saw its shares tumble in the new year after reporting subdued Christmas trading.

Elsewhere, CMC Markets and IG make the list after investors deserted them en masse after regulators stepped in to tighten rules on highly-leveraged trading products. But how will that play out, and how will those groups respond?

Likewise, you see companies like Aberdeen Asset Management, which has seen many millions of fund outflows recently. And then, of course, there's Sports Direct, a once high achiever in terms of market performance, but now suffering from a damaged reputation.

A contrarian approach to mid-caps

It's heartening to see the domestically-focused FTSE 250 breaking new highs. But it's clear that the index remains home to some very battered names, and others facing varying degrees of uncertainty. For those contrarians prepared to take a pragmatic, rather than emotional, approach, these stocks and sectors may well harbour opportunities. Some may take a long time to recover (and some may not recover at all) - but those that do may well produce exceptional results.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson ofStockopedia.com, the rules-based stockmarket investing website. You canclick here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.