Contrarian investing isn't for everyone. Most of the time, it's easier to just buy shares of an index fund rather than develop a unique investing thesis that takes advantage of going against the grain.
But if you know about a few of the market's tailwinds right now, you'll be in a much better position to make contrarian bets that have the possibility of large payoffs. Let's investigate three such tailwinds (as well as a couple of stocks that are likely to benefit from them) so that you'll have a few actionable ideas about how to make your own contrarian plays this year.
1. Valuations are plummeting
By definition, contrarian investors make bets that are against the market's consensus. When they make those bets, each dollar they invest gets them a certain amount of value, whether it's measured by the price-to-earnings (P/E) ratio or the price-to-sales (P/S) ratio or another metric. Thanks to the ongoing bear market, valuations are falling sharply, meaning that investors get more bang for their buck when they buy.
Take a heavily bruised growth stock like Cresco Labs (CRLBF 2.49%), for example, a cannabis cultivator whose shares fell by more than 61% so far this year. At the end of the first quarter last year, its P/S ratio was 5.5 whereas now it's 1.1. Over the last three years, its trailing 12-month revenue grew by 574%, reaching over $865.8 million.
In other words, anyone starting a contrarian position betting that Cresco's shares are going to appreciate in the long term is getting a lot more revenue for every dollar they spend than they could have previously. And if that thesis is correct, it'll reward investors who buy the shares now.
2. Bear markets don't last forever
While it's more of a fact of life than a tailwind, contrarian investors know that bear markets can't continue on for eternity. Eventually, market sentiment improves for some reason, and growth returns. But when the market turns, it can be hard to realize in the moment, and timing the market is nearly impossible. And that's why contrarians are often comfortable with continuing to buy shares even as the market continues to fall.
Then, perhaps years later, the market's recovery powers outsized returns for those who were daring enough to get in when others were too afraid. Of course, you'll have much better chances if you focus on companies with some competitive advantage that other investors are undervaluing or disregarding.
3. Innovation isn't on pause
The final tailwind for contrarians is innovation. Innovation doesn't stop when a company's stock falls. Consider Intuitive Surgical (ISRG -0.55%), a business that develops robotic surgical suites for use in hospital operating rooms. Its shares are down by 46% over the last 12 months, but at the same time, its research and development (R&D) expenses over the past 12 months total some $767 million.
Sooner or later, its ongoing investments in developing new robotic tools and other high-tech products will likely pay off in the form of new revenue growth. It's true that investors could opt to stay on the sidelines until those hardware projects are closer to generating income than they are now. But contrarians who are willing to bet today on the company's technological progress could see superior returns to those who wait. That's doubly true in markets like Intuitive's, which are driven by disruptive innovations that steal market share from legacy products.
To be clear, you don't need to be a contrarian to get the benefit of investing in innovative companies doing their thing. It's just that contrarians tend to be the ones willing to ignore the short-term share-price movements to focus on what really matters: activities that make businesses more valuable tomorrow than they are today. For Intuitive Surgical, those activities are a perpetual process, and that's why its innovations are worth betting on, even if its stock might drop through a bear market.
