2 Contrarian Investment Plays

TEJ KOHLI | 24 March 2021

‘Buy the dip’ is sage advice that many individual investors heeded during the pandemic-induced lows of 2020. Whilst technology ‘growth’ stocks continued to boom, many traditional dividend-paying ‘value’ stocks suffered badly during the first half of 2020. Yet today many of these stocks have gradually recovered to something approximating their pre-pandemic levels, and investors who bought their dip will have mostly recouped big gains.

These gains are in part because investors are starting to see an eventual return to ‘normality’ after the black swan event of 2020; and also because of the rotation from growth stocks back into value stocks that I identified in my post of December 2020. In that same post I also asked whether it was already too late to invest into value stocks.

There is nothing worse as an investor than not backing a stock that you have a strong instinct will appreciate, and then having to watch from the side lines as it soars. Hindsight can be very punishing when you have to watch gains of more than 100% from stocks that you were not quite contrarian enough to punt at what turned out to be their low.

So, when you see a stock that hasn’t really bounced back, you have to ask yourself whether it might be a late opportunity to be brave and make a contrarian investment play? That is exactly how I currently feel about Hammerson (LSE:HMSO) and Costain Group (LSE:COST). Both stocks are currently trading at a tiny fraction of the price that they were back in 2018, and I cannot decide whether they are a contrarian opportunity – or a total folly.

It doesn’t help that when looking at these stocks I am presented with a dilemma. Clearly their depressed stock prices are not merely the consequence of stock market malaise, but a reflection of real underlying problems within each company. The question is whether the markets have ‘over punished’ these stocks to such a low base that they now offer a big upside opportunity, even if their prices may never fully recover to their levels of 2018.

Moreover, my expertise are as a technology investor backing forward-leaning companies and ventures, and as a real estate investor focused on technology clusters. To understand the prospects of shopping centres (Hammerson) or infrastructure solutions (Costain) would require a deep dive. So, my instinct in these circumstances is that an investment is best avoided… but what if two years from now these stocks did return to their 2018 levels?

Hammerson is the easier of the two to get to grips with. The company just posted the biggest loss in its history (£1.7 billion) and, as the owner of a huge portfolio of retail properties and shopping malls, most likely now finds itself on the wrong side of history. During 2020 its rent collection dropped to 76% and occupancy fell from 97.2% to 94.3%.

Yet during 2020 Hammerson was able to successfully execute a £800m rights issue to shore up its position, and on 12th March its Board proposed reestablishing its dividend. The share price initially climbed – albeit from a very low base – upon this announcement, but investor sentiment then quickly cooled again, and the price is currently at 32.78p. There is 33% of upside if Hammerson were to return to its 52-week high of 43.50p, and an astonishing 681% of upside if the stock were to return to its price of exactly three years ago. The latter won’t happen, but an appreciation to somewhere between these values is not unthinkable.

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