10 value stocks for contrarian investors

Could we see a swing back to value investing in the remainder of 2021? Stockopedia’s Ben Hobson shares his latest research.

High-quality shares have been in the ascendancy over the past 18 months. Against the backdrop of an unsettled economy, investors have swooned over strong, financially resilient firms, which is exactly what you’d expect. But as we enter the final quarter of the year, the expensive valuations of some of those quality stocks could be the trigger for value investing strategies to bounce back.

Value investing - the part-art, part-science endeavour of buying shares that are mispriced in the market - has had a hard time since the financial crisis.

Prevailing conditions have favoured growth at the expense of value. For sure, there have been moments when value shined, but for the most part it has been difficult for contrarians.

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Yet things might be poised to change. Bullish market conditions have flattened off since the summer. And now there’s a sense that value could be well placed to deliver stronger returns in the months ahead.

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Strategy-wise, we’re starting to see increasing numbers of shares passing the rules of value hunters. One of those strategies is based on the approach of the revered US value investor Bill Miller.

Miller made his name as the chairman and lead investor at Legg Mason Capital Management. Between 1991 and 2005, he guided the Legg Mason Value Trust to a record 15 consecutive years of beating the S&P 500. But by the late 2000s, value was out of favour again and Miller really suffered as a result.

Today, the billionaire investor is back to his best and still active in the market using his value philosophy at his own firm. A strategy tracked by Stockopedia based on Miller’s approach has seen a theoretical 62% gain over the past year, versus 19% from the FTSE 100.

That strategy has some interesting features. For a start, it uses the price/earnings to growth rate (or PEG), to look for stocks that offer “cheap growth”. It also looks for solid free cashflow (FCF), and evidence that the free cashflow is growing. Sales should also be growing over time and debt to assets should be below average. So this strategy is very much focused on finding good quality features in stocks that may be underpriced.

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Miller once wrote: "We are value investors because we are persuaded of the logic of buying shares of businesses when others want to sell them, and we understand that lower prices today mean higher future rates of return, and high prices today mean lower future rates of return."

Here are some of the stock that currently pass those rules:

Miller’s approach focuses on finding mispricing. Even if the stock in question has high valuation ratios, his main question is whether the market has got the price wrong. This list includes a number of shares that have performed well in the market over the past year but may still be cheap against these rules. They range from large-caps such as J Sainsbury and Royal Mail right through to small-caps such as Wentworth Resources, OPG Power Ventures and Vertu Motors.

For investors, the current transition from Covid-inspired economic uncertainty to supply chain concerns, inflationary pressures, and a slowdown in China all add to a melting pot of tensions in the stock market. It seems that in these conditions, value investing strategies could start to play a more influential role. While quality remains a very important factor to consider when picking shares, hunting down mispricings could also be rewarding in the months ahead.

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