Of all the standard investing strategies, the contrarian purchase of ill-regarded value stocks is inarguably the sexiest. According to Investopedia, “Contrarian is an investment style that goes against prevailing market trends by buying poorly performing assets and then selling when they perform well.” It’s actually not a style. Rather, contrarianism is something that we all aspire to, but is actually achieved quite infrequently.
Proponents of the strategy take the basic idea of buying low and selling high to the next level. Rather than target companies that are on every analyst’s “must buy” list, contrarians look to the dumpster for battered value stocks. In theory, if you buy an asset that has lost considerable capital, it’s less likely that further losses will incur.
In reality, such reasoning could lead to untold damage.
If the contrarian strategy was so easy to duplicate, everybody would simply buy underperforming value stocks. Why go through the trouble of assessing risks for potential candidates? In such a scenario, one only needs to concentrate on the worst value stocks to gain massive success.
Of course, that’s just not how things work in the real world. Quite often, beaten-up value stocks have a mundane reason why they’re in a predicament. Perhaps management has made poor business decisions that are coming back to haunt them. Or maybe the industry to which they belong is suffering a cataclysmic shift in demand. No matter what the actual cause, jumping on board without careful consideration is a foolhardy but avoidable mistake.
Here are three battered “value stocks” that aren’t bargains — they’re bombs!