Markets might still remain in an uptrend, but an intermediate correction seems like a possibility. And while this does not imply that investors should panic, it makes sense to consider some contrarian stocks. These stocks have largely been under-performers. However, as markets look for value, contrarian stocks might rally in the coming quarters.
Overall, the S&P 500 Index trades at a cyclically adjusted price-earnings ratio (P/E) of 37.98. That said, I would further look at investing in some low-beta stocks to protect the portfolio from profit erosion. Taking some profits off the table in stocks that have provided multi-fold returns also makes sense. Collectively, though, it’s a time to be cautiously optimistic.
However, I don’t see any major selloff in the markets. The simple reason is as follows: Even with the rate hike, real interest rates will remain negative for an extended period. People need to invest or trade in equities for returns that beat inflation.
With that in mind, let’s analyze four contrarian stocks that are worth considering for the next few quarters. All these companies are fundamentally strong, but have been out of favor due to near-term headwinds. They are:
Now, let’s dive in and take a closer look at each one.
Contrarian Stocks to Bet On: AT&T (T)
AT&T stock has been among the underperformers in the last 12 months. Thus, the stock clearly seems to be out of favor. However, valuations are mouthwatering at a forward P/E ratio of just below 8.5. I would bet on a strong reversal for T stock as the company approaches the de-merger deadline.
Moreover, T stock also has a current dividend of $2.08 and an attractive yield of 7.64%. However, dividend will be cut to half once the de-merger of the media division is completed. This might disappoint income investors, but I believe that the value unlocking from the de-merger will more than offset the dividend cut factor.
It’s also worth noting that the company has already invested $60 billion in the 5G wireless and fiber and premium content. The company’s post-paid phone subscribers and fiber subscribers have been trending higher. And with 5G penetration, I am bullish on the segment.
At the same time, HBO MAX and HBO subscribers have increased to 67 million globally. AT&T expects 70 to 73 million subscribers towards the end of 2021. With the impending merger with Discovery (NASDAQ:DISCA) and sustained subscriber growth, the business outlook is bright.
Overall, the worst for T stock might be over. And over the next few quarters, the stock can be a potential performer.
The best time to buy a quality stock is when there is blood on the streets. JD stock has declined from highs of $108 to current levels of just under $81 per share. Chinese stocks have been facing regulatory headwinds, and this has resulted in a sharp correction across stocks and sectors.
However, amidst the carnage, the core business remains robust. For second quarter of fiscal year 2021, the company reported revenue of $39.3 billion, which was higher by 26.2% year-over-year (YOY). It’s also worth noting that for the twelve months ended June 2021, the company reported operating cash flow of $6 billion.
With sustained growth in top-line and with healthy cash flows, JD stock is among the top contrarian bets. And once the regulatory headwinds wane, the stock is likely to trend higher.
Additionally, an important point to note is that the company’s business is diversified across JD Retail, JD Logistics and several new businesses. So with ample financial flexibility, the company can invest in innovation and acquisitions.
In the core commerce business, growth is likely to sustain for JD.com with the pandemic accelerating e-commerce adoption. JD.com also has the best logistics network in China and this will help the company make significant inroads into tier two and tier three cities.
Overall, JD stock looks attractively valued after a meaningful correction. And with fear being the collective sentiment related to Chinese stocks, it’s a good time to buy.
Contrarian Stocks to Bet On: Altria (MO)
MO stock is another name that looks like a good contrarian bet. The stock has marginally trended higher in the last 12-months. However, at a forward P/E ratio of 10.7, the stock is undervalued. A dividend yield of 7.2% is another factor that makes MO stock worth considering.
Moreover, an important point to note is that Altria is in a phase of business transformation. The company has been increasingly investing in oral tobacco product segment. However, the cigarette segment remains the key revenue and cash flow driver. In particular, the Marlboro is likely to remain the cash flow machine even as sales decline on a relative basis.
In the oral tobacco product segment, Altria reported revenue of $1.32 billion for the first half of 2021. YOY, revenue was higher by 4.6%. Therefore, with expanding retail presence for oral tobacco products, sales growth can potentially gain further traction.
Also, Altria holds a 45% stake in Cronos (NASDAQ:CRON). And it’s likely that cannabis is headed for legalization in the United States in the near future. Thus, in the next few years, the company’s investment in Cronos can be a potential value creator.
Overall, MO stock is undervalued with cash flows remaining robust. Additionally, the cannabis and oral tobacco segment growth can serve as a stock upside catalyst.
Barrick Gold (GOLD)
There seems to be an expectation that the first-rate hike might come sooner than expected. This is one reason for gold declining in the recent past. However, Federal Reserve chairman Jerome Powell recently indicated that the delta variant casts a shadow on economic activity. There might be a strong case for delay in the first-rate hike if the delta variant causes further economic damage.
In this scenario, investing in gold and gold mining stocks might be a good idea. If expansionary policies sustain, gold is likely to trend higher again. That said, GOLD stock has been an underperformer in the last 12 months. However, I believe that the stock is due for reversal and exposure can be considered at current levels.
The company has a stable production outlook for the next 10 years, and GOLD stock is attractive at a forward P/E ratio of 16.5. Furthermore, Barrick Gold reported an all-in-sustaining cost of $1,052 an ounce for the first half of 2021. If gold trades near $2,000 an ounce in the medium-term, the company is positioned for healthy EBITDA margin and cash flows.
For the first half of the year, the company reported free cash flow of $744 million. Additionally, the company has $5.1 billion in cash and equivalents. Therefore, there is ample financial flexibility for dividends and for capital investment.
Overall, GOLD stock has a decent dividend yield of 1.8% and an attractive valuation. The stock is positioned for a strong reversal if gold trends higher.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.