Equities provide one of the most fertile grounds for contrarian investing. Among all asset classes, shares are particularly prone to sentiment-driven mispricings. Corporate narratives, quarterly earnings volatility and media coverage can cause investor behaviour to swing sharply between optimism and despair.
These fluctuations often result in entire sectors or individual companies becoming undervalued not because of fundamental deterioration, but because of negative sentiment. Contrarian investors in equities seek to capitalise on these situations by identifying overlooked opportunities that offer a margin of safety and the potential for long-term revaluation.
BUYING UNLOVED SECTORS: WHEN THE MARKET TURNS AWAY
One of the most common contrarian approaches involves investing in sectors that have fallen out of favour. These sectors may be under pressure due to economic conditions, regulatory change or cyclical downturns. For example, during periods of rising interest rates, capital-intensive industries such as utilities or real estate often see investor outflows. Similarly, when oil prices collapse, energy stocks tend to suffer heavy losses. Contrarians monitor these shifts and ask a fundamental question: has the market overreacted?
Rather than attempting to time cyclical recoveries precisely, contrarian investors assess whether current prices reflect overly pessimistic expectations. If a sector continues to generate stable cash flow, maintain balance sheet strength or adapt its business model, a rebound in valuation may follow once sentiment begins to normalise. Historical examples include the post-financial crisis recovery of banking shares, which were deeply discounted in the early 2010s and the rebound in commodity producers following the 2015–2016 resource bear market.
Contrarians approach unloved sectors with caution. They distinguish between temporary unpopularity and structural decline. A sector suffering from a cyclical downturn may offer value, but one facing terminal disruption – such as legacy media or certain print businesses – may not recover. Rigorous analysis of underlying trends, earnings durability and competitive positioning is essential before allocating capital.
TURNAROUND STOCKS: INVESTING IN RECOVERY STORIES
Turnaround investing is another area where contrarians find opportunity. These are companies that have experienced operational setbacks, management failures or financial stress but are in the process of strategic recovery. When a company disappoints the market, its share price often falls sharply and investor confidence deteriorates. In many cases, this creates an environment in which the share price no longer reflects the company’s true long-term potential.
Contrarians look for early evidence that the worst may be over. Signs of a credible new management team, cost restructuring, asset sales or a revised capital strategy can indicate a company is repositioning itself. If the market continues to price the company as though failure is inevitable, the upside potential becomes significant.
However, turnaround stocks carry high risk. Some companies never recover and may face permanent capital destruction. For this reason, contrarians apply strict selection criteria. They often favour firms with manageable debt levels, core operations that remain profitable or tangible assets that support valuation. They also allow for a margin of error, ensuring that the investment case does not rely on perfect execution.
Timing is another challenge. Recovery stories can take years to play out and short-term volatility is common. Contrarian investors maintain a long-term horizon and accept the potential for underperformance during the early stages of a turnaround. Their focus remains on the direction of change rather than current market sentiment.
DEEP VALUE PLAYS: INVESTING IN EXTREME DISCOUNTED EQUITIES
Deep value investing, or buying shares trading at significant discounts to book value or normalised earnings, is perhaps the purest form of contrarian equity investing. These stocks are often ignored or avoided by the broader market due to poor recent performance, unfashionable business models or a lack of short-term catalysts. Yet within this neglect lies opportunity.
Contrarians seek out these companies precisely because they are overlooked. They evaluate whether the current valuation implies permanent impairment or whether the market has simply lost interest. In some cases, these companies may be generating positive cash flow, hold undervalued assets or operate in niche markets with defensible advantages. When bought at a steep discount, even modest improvements in perception or performance can lead to a substantial rerating.
Examples of deep value opportunities include companies trading below tangible book value, firms undergoing asset break-ups or businesses emerging from bankruptcy proceedings. These are not conventional growth investments; rather, they represent situations where pessimism has pushed prices far below intrinsic value.
Investing in deep value requires patience and a high tolerance for contrarian thinking. These stocks can remain depressed for extended periods and are often excluded from mainstream portfolios. Liquidity can be limited and sentiment rarely improves quickly. As such, deep value investing is best suited to investors who can conduct detailed fundamental research and remain independent in their decision-making.
THE IMPORTANCE OF DIVERSIFICATION AND DISCIPLINE
Contrarian investing in equities demands careful risk management. Individual positions can underperform for reasons unrelated to sentiment mispricing, such as poor governance, secular decline or external shocks. For this reason, contrarians diversify across themes, sectors and geographies. They avoid overconcentration and maintain capital reserves to take advantage of future dislocations.
Discipline is equally important. Emotional detachment, a clear investment framework and a commitment to valuation principles are essential. Contrarians must avoid the temptation to chase early rebounds or abandon positions during periods of volatility. Their advantage lies in identifying where others have misjudged value, not in predicting short-term price movements.
Equities offer a dynamic landscape for contrarian investors. From distressed sectors to turnaround situations and deep value shares, the equity market regularly presents opportunities shaped by investor emotion. By focusing on fundamental value and resisting crowd behaviour, contrarians aim to unlock returns where the broader market sees only risk.
To learn more about contrarian investing, visit Orbis Investments' Contrarian Investing Playbook.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.