I’m old enough to remember the Seinfeld episode where George does the opposite. Finally, after realizing his every instinct in life has been wrong, George Castanza resolves to do the opposite and things finally begin to turn around for him. A similar strategy, contrarian investing, can work for investors as well. A recent edition of Investment News provides examples of two bits of supporting research.
The surest way to profit from takeover speculation in the stock market is to bet it’s wrong. When analysts say ‘sell,’ it’s time to buy, data show.
Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent. (How to play takeover rumors? Bet against them – Investment News.)
Following the advice of equity analysts may be perilous to your profits. Although companies in the S&P 500 that analysts loved the most saw their stocks rise 73% on average since the benchmark for U.S. equity started to recover in March 2009, those with the fewest “buy” recommendations gained 165%, according to data compiled by Bloomberg. (When analysts say ‘sell,’ it is time to buy, data show. (When analysts say ‘sell,’ it is time to buy, data show.)
Contrarian investors might do even better by using activist strategies to unlock value that goes unrecognized by analysts.