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.

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"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 investment expert with a demonstrated depth of knowledge in financial markets, investment strategies, and portfolio management, I can confidently analyze the concepts discussed in the article and provide valuable insights.

The article features Guy Pope, the manager of Columbia Threadneedle's Contrarian Core Fund, who has a remarkable track record of outperforming the market. His success is attributed to a contrarian investment philosophy, emphasizing finding out-of-favor stocks and navigating through pessimism. Let's break down the key concepts used in the article:

  1. Contrarian Investing Philosophy:

    • Pope's approach is contrarian, meaning he seeks investments that are currently unpopular or out of favor with the majority of investors.
    • The philosophy involves going against the market sentiment and looking for opportunities where pessimism may lead to undervalued stocks.
  2. Performance Metrics:

    • Pope's performance is highlighted by beating 95% of his peers over the last five years and consistently outperforming the benchmark Russell 1000 for a decade.
    • Performance metrics such as these are crucial evidence of his expertise and success in implementing the contrarian strategy.
  3. Market Trends and Timing:

    • Pope's success stories involve strategic moves based on market trends. For instance, during the strong growth in 2021, he adopted a larger value position, anticipating a market correction, which indeed happened in the following year.
    • This demonstrates Pope's ability to read market trends and make timely adjustments to his portfolio.
  4. Screening for Out-of-Favor Stocks:

    • Pope uses a simple but effective metric for screening potential investments – focusing on stocks in the bottom third of their 52-week range.
    • This screening method captures stocks that are currently facing pessimism, aligning with his contrarian approach.
  5. Secular Headwinds vs. Transitional Issues:

    • Pope distinguishes between secular headwinds and transitional issues when selecting stocks. He prefers stocks facing transitional issues rather than long-term secular challenges.
    • This shows a nuanced understanding of the factors influencing stock performance and a commitment to careful stock selection.
  6. Portfolio Management and Discipline:

    • Pope and his team constantly re-test their investment theses, ensuring that the stocks in the fund meet their criteria.
    • The "down-15 rule" is a unique discipline where if a stock is down 15% relative to the cost, a third of the position is cut, and the stock undergoes a full review. This highlights a disciplined approach to managing the portfolio.
  7. Three Contrarian Stock Picks:

    • Pope shares three stock picks that are closer to their 52-week lows, fitting the contrarian label.
    • The stocks mentioned are Elevance Health (ELV), Nike (NKE), and Charles Schwab (SCHW), each with its specific rationale based on market dynamics and potential for future growth.

In summary, Guy Pope's success lies in his disciplined contrarian approach, astute market timing, and a careful selection process. His track record and performance metrics provide compelling evidence of his expertise in navigating financial markets.

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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