A fund manager who has outperformed 95% of competitors over the last 5 years shares the one metric he looks for in his investments — and recommends 3 contrarian stock picks (2024)

With so much optimism infusing markets at the moment, it's almost refreshing to chat with a pessimist like Guy Pope, the manager of Columbia Threadneedle's Contrarian Core Fund.

Employing a philosophy of finding out-of-favor contrarian investments, he doesn't use complicated algorithms or obscure metrics to find the stocks he adds to his fund.

In fact, his strategy for beating the market is shockingly simple.

It's resulted in performance that gives him nothing to be pessimistic about. He's beaten 95% of his peers in the last five years, and his fund has beaten its benchmark — the Russell 1000 — for a decade now.

Start with pessimism

When it comes to consistently outperforming the market, Pope credits his success to one main factor: searching areas that other people aren't focused on. He prefers a contrarian perspective and searches for under-loved opportunities.

"We like to go through groups of stocks that exhibit a high degree of pessimism as our starting point for new ideas, and then from there it's a really careful stock selection process," he said.

Pope added: "What's out of favor has a tendency to go back into favor, and if you're kind of seeding part of your portfolio with those contrarian ideas as they possibly go back into favor, that can help enable consistency."

Paying attention to stocks the rest of the market actively dislikes has proven to be a successful strategy across the years when the market is particularly volatile — such as the last three years, for example.

As Pope pointed out, 2021 was a strong year for growth stocks as the market soared post-pandemic — rather than follow the trend, Pope took on a larger value position. That turned out to be a prescient move the following year, when the market tanked and the growth stocks that had been flying so high were brought low. Meanwhile, Pope's value positions prospered as the market turned to the safety of value, so Pope did what he does best and looked where everyone else wasn't: growth.

And wouldn't you know it, the next year saw an incredible market rally led by the sort of growth stocks Pope had filled his portfolio with, helping him outperform 97% of competitors in the last 12 months.

How to find the right out-of-favor stocks

Pope's goal is to find stocks the rest of the market isn't interested in at the moment. To do so, he uses a deceptively simple metric.

"We screen on price," Pope said. "So stocks in the bottom third of their 52-week range, so it's different, but it does capture pessimism.

Rather than chase the latest investment touted on CNBC, Pope prefers to wait for hot stocks to run into problems and take a hit to their share prices. But he's not trying to fight the trend, and noted that secular headwinds can outlast even the most stubborn of investors.

"Importantly, as we look at these names on our screen, we want to find the ones that have transitional issues versus secular headwinds," Pope said. "I don't recommend you just buy the screen by itself and call that your portfolio because those secular headwinds will really weigh down that group of stocks. So we want to find the ones that have transitional issues versus the secular headwinds."

Once the stocks are in the portfolio, Pope doesn't just kick back and call it a day. He and his team are constantly re-testing their investment theses, making sure the stocks in the fund meet their criteria. Reasons to sell a stock include anything from a failed investment idea to freeing up capital for a better opportunity elsewhere, though there is one that's specific to his fund.

"The final reason is we call it the down-15 rule," Pope said. "If the stock is down 15% relative to our cost, we'll cut a third and bring it up for a full review like it's a brand new stock. It's just a unique rule to our product. We made it up, but it's just trying to get after and be proactive with stocks that are not operating like we think they should have."

3 contrarian stock picks

A straightforward strategy and a distinctly disciplined approach have combined to give Pope and his fund a leg up on the competition. To help others do the same, Pope shared three stocks "that are closer to their 52-week lows, and their 52-week highs have not participated over the last year, to kind of fit that contrarian label right now."

"There's definitely a level of uncertainty, but I think if you give it 18 to 24 months, the ideas are pretty sound and there's decent upside in all three," he noted.

The first is Elevance Health (ELV). True to form, Pope's pick enjoyed a strong 2022 but took a hit in 2023, falling out of favor as medical costs trended higher. But Pope thinks these issues will pass, leaving Elevance poised to outperform.

"We just think it's a cheap stock and, from an industry perspective, the industry's pretty good about repricing their business every year," Pope said. "So we think they may be offsides here in 2024, but I think they'll course correct at the end of the year, investors will know that and be looking forward to a 2025 that's better."

Next is Nike (NKE), which is down over 20% in the last 12 months thanks to poor sales comps. Pope pointed out that the company's sales soared during pandemic lockdowns as athleisure-wear grew more popular, but when lockdowns ended sales trailed off, and the stock was punished. Pope believes the company could turn sales around over the next two years, and its margins could expand from 12% to 17%.

"They recently announced a $2 billion cost savings program, which if it all falls to the bottom line has 400 basis points of margin, which would get you well on your way to that 17% goal," Pope said. "I think as they get back on track with margins, that's going to provide growth, and then as they course correct on sales, that's going to give them some more growth as well. So I think you could see double-digit earnings growth for the next three years."

Pope added: "A lot of different things have gone on, so I think their conviction and focus to improve margins is definitely there right now."

Finally, Pope highlighted Charles Schwab (SCHW), which has struggled in the last few months as interest rates have waxed and waned. Before the pandemic, Charles Schwab was enjoying a strong net interest margin that shrank as rates fell, but it has since begun to recover as rates have risen.

"I think from an operating perspective, it's going to be a transition period for this year as well, but I think the inflection is starting to take off again for the net interest margin," Pope said. "So over the next 24 months, it wouldn't surprise me to see us go from roughly a 1.9 level up to, exiting 2025, closer to a 3% level. So really a lot of leverage in the business that's going to translate to strong earnings."

As an expert and enthusiast, I don't have personal experiences or beliefs, but I can provide you with information related to the concepts mentioned in the article you shared.

Guy Pope and Columbia Threadneedle's Contrarian Core Fund

Guy Pope is the manager of Columbia Threadneedle's Contrarian Core Fund. His investment strategy focuses on finding out-of-favor contrarian investments rather than using complicated algorithms or obscure metrics. This strategy has resulted in strong performance, with Pope's fund outperforming 95% of his peers over the last five years and consistently beating its benchmark, the Russell 1000, for a decade.

Pope's Contrarian Perspective

Pope attributes his success to his contrarian perspective. He looks for areas that other investors are not focused on and prefers to invest in under-loved opportunities. Pope believes that what is currently out of favor has the potential to go back into favor, and by including contrarian ideas in his portfolio, he aims to achieve consistency in performance.

Searching for Out-of-Favor Stocks

To find the right out-of-favor stocks, Pope uses a simple metric: he screens for stocks in the bottom third of their 52-week range. This metric captures stocks that are currently experiencing pessimism in the market. Pope waits for hot stocks to encounter problems and their share prices to decline before considering them for investment. However, he emphasizes the importance of distinguishing between stocks with transitional issues and those facing long-term secular headwinds. Pope recommends focusing on stocks with transitional issues rather than those burdened by long-term challenges.

Constant Evaluation and Selling Criteria

Once stocks are included in Pope's portfolio, he and his team continuously evaluate their investment theses. They ensure that the stocks meet their criteria and consider selling a stock for various reasons, such as a failed investment idea or the need to free up capital for better opportunities. Additionally, Pope's fund has a unique rule called the "down-15 rule." If a stock is down 15% relative to its cost, a third of the position is cut, and the stock undergoes a full review as if it were a new stock. This rule allows Pope to be proactive with stocks that are not performing as expected.

Three Contrarian Stock Picks

Pope shared three stocks that he considers to be closer to their 52-week lows and have not participated in the market's recent highs. These stocks align with his contrarian approach and have the potential for decent upside in the next 18 to 24 months. Here are the stocks he mentioned:

  1. Elevance Health (ELV): Pope believes this stock is currently undervalued and expects it to correct course in 2025, leading to better performance. He considers it a cheap stock with potential for improvement in the industry's business repricing.

  2. Nike (NKE): Despite poor sales comps in the last 12 months, Pope sees potential for Nike to turn sales around over the next two years. He also expects the company's margins to expand, which could contribute to double-digit earnings growth for the next three years. Pope mentions that Nike has announced a $2 billion cost savings program that could positively impact its margins.

  3. Charles Schwab (SCHW): Pope highlights Charles Schwab as a stock that has struggled recently due to fluctuating interest rates. However, he believes that the net interest margin is starting to recover and expects it to increase over the next 24 months. This recovery could lead to strong earnings growth for the company.

Please note that the information provided is based on the article you shared, and it's always a good idea to conduct further research and analysis before making any investment decisions.

A fund manager who has outperformed 95% of competitors over the last 5 years shares the one metric he looks for in his investments — and recommends 3 contrarian stock picks (2024)
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