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3 Reasons Why Contrarian Investors Could Be the New Financial Rock Stars

In the classic war movie, Too Late the Hero, Michael Caine’s character tells his co-star, before running across enemy lines, “Don’t forget to zigzag,” to which he gets the reply, “You zig, I’ll zag.” Though both characters end up getting shot for their efforts, the idea of zigging while others zag can make a lot of sense when playing the stock market. Here are three good reasons why:

Extra turbulence equals bigger wins

Buying stock just when more cautious investors are dropping it can make perfect sense, so long as you can deem their reasoning as unsound or short-sighted. A PR malfunction for, let’s say, a major oil producer can cause stocks to slide, but if you can be sure that the company in question is in it for the long haul, it might be a good time to take advantage of lower prices and snap up a bargain.

With huge swings in fortune set to dominate the financial landscape over the next couple of years, the scope to win big in the mid to long term is enormous.

Ditch quick or hold on tight; contrarianism can pay off

Whether you choose to buy cyclical or defensive stocks, buying on the downswing can make a lot of sense. Choosing a big food retailer is a classic defensive move in a turbulent economy, although retail is definitely still taking a bit of a knock at the moment, while cyclical assets such as real estate continue to buck and kick.

Or you may want to take a gamble on the longevity of the coming marijuana boom, a growth market that is set to take off big time starting in the latter half of 2018. Look to Aurora Cannabis Inc. (TSX:ACB) or MedReleaf Corp. (TSX:LEAF) for hungry, innovative pot players that look set to go all the way.

Whichever model you tend to favour, there are both short- and long-term benefits to going against the grain.

The current economic climate is ripe for contrarians

What with the new protectionist stance of the U.S., the continued ascent of the Asian Century, and the looming European reshuffling pre- (and post-) Brexit, the global economy is undergoing financial turbulence that has investors spooked—and rightly so. Meanwhile, perfectly good stock is being undervalued, meaning that there are good pickings for shrewd contrarians.

Let’s take a careful reading of two ostensibly similar energy stocks as an example of how this works:

Uranium miner Cameco Corp. (TSX:CCO)(NYSE:CCJ) is, on the face of it, a good contrarian buy, poised for resurgence. But is it really? Uranium may be seen as a risky asset at the best of times, even to hard-core energy investors; plus Cameco’s uptick may not actually happen, leading to a value trap.

A better value energy stock might then be something like Columbian natural gas and oil leader Canacol Energy Ltd. (TSX:CNE), especially in the mid to long term. This strong, well-placed energy company looks due to pay off big over the coming years, and might well be one to hold on to.

Read around your chosen asset sector if you want to get a sense of which companies are going to help you cash in—it’s essential.

The bottom line

By picking the right companies to back, contrarian investors can really come into their own over the next few years. If you know how to tell the difference between value traps and winning players, zig-zagging can make the difference between a proverbial flutter on the horses and winning the lottery. Pick an upcoming star like MedReleaf or a solid long-range defensive player like Canacol for big gains.

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Fool contributor Victoria Hetherington has no position in the companies mentioned.

 

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