Tuesday, April 22, 2008 0 comments ++[ CLICK TO COMMENT ]++

Good Example of Contrarian Stock Performance

One of the key points I learned from reading the excellent contrarian investing book by David Dreman, Contrarian Investment Strategies in the Next Generation, is that out-of-favour stocks do exceptionally well during bear markets compared to favoured stocks. The expectations are so low for beaten-down stocks that mild positives can cause them to rally. We have a really good example of this unfolding before our eyes.

This may come surprising to many but one of the best peforming industries right now is homebuilders! The industry is up around 15% year to date while most of the market is slightly positive to negative. There is so much negativity around them yet they are rallying in the face of bearish news. Check out the analysis by Bespoke Investment Group (courtesy SeekingAlpha):

Who knows if this rally will last but the point is that out of favour stocks can do well in the face of negative news. A newbie investor or someone who doesn't understand the psychology of the market would never expect most of the homebuilder stocks to be up 15% to 30%.

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