Contrarian Industries

One way to look for contrarian ideas is to look at the worst performing industries (needless to say this is the opposite of what growth or momentum investors would do.) Shown below are the worst industries in the last 5 years, according to Dow Jones and Morningstar categorizations. (as usual click on the image for a larger, more legible, table.)






The lists are quite similar. The best performing industries are those in the commodity complex. The worst are anything that got infected with the subprime virus: homebuilders, banks, furniture makers, and so on.

I would avoid areas like homebuilders and rather look at the medium-term underperformers like paper, media, automobile parts suppliers, insurance, and so on. One of the reasons is because industries that did really well in the past rarely lead in the future. Given that we just had an unprecedented real estate bubble, it is not clear when homebuilders, banks (with lots of real estate assets), and so forth, will recover. It is quite possible for them to underperform even if a bull market started today. In contrast, industries such as media, insurance, and even the struggling auto industry are totally out of favour and have been underperforming even without the real estate problems.

The risk with the latter underperformers, though, is that some of them are seriously in trouble (eg. American auto manufacturers) while others are in industries in secular decline (eg. paper, newspapers.) Many businesses in these industries are most likely value traps so one needs to avoid them at all costs.

Having said all that, valuation is what matters and it is quite possible that, say, a homebuilder is a better investment if the numbers are good. I should also note that industry performance in other countries may differ. For example, newspapers in Asia are growth industries whereas they are an almost-bankrupt industry in America and Canada (they are also doing ok in Europe.) Some regions like Europe are hitting low valuations so it may be worth looking there in various industries rather than paying a risk game trying to avoid value trips in America.

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