It’s not easy investing in contrarian stocks, as they’re down for a reason. As Forbes describes, “Contrarian investing is choosing to put your money into assets that go against the grain of market sentiment. When the stock market is selling off, contrarian investors jump in and buy — or they sell when there’s a flurry of buying.”
Here are a couple of stocks that are down but have the potential to grow meaningfully over the next three to five years.
Bank of Nova Scotia stock
Bank of Nova Scotia (TSX: BNS) stock has lagged Canadian bank stocks for years, suggesting that its international strategy did not pan out as well as it had hoped. As a result, the bank had to exit a number of markets. Today, its focus outside North America is primarily in Latin American markets, including Mexico, Peru, Chile, and Colombia. Of course, it maintains a core position in Canada as one of the Big Six Canadian banks.
Because Bank of Nova Scotia has been the weakest bank stock among the group and has kept its dividend safe, it now offers the juiciest dividend yield of the bunch — a 6.9% dividend yield. On further weakness, investors might even be able to pick up shares for a yield of 7% or higher.
The relatively new Scotiabank chief executive officer, Scott Thomson, could help right the ship, but it takes time for new strategies to play out. At $61.15 per share at writing, BNS stock trades at a single-digit price-to-earnings (P/E) ratio of approximately 9.3. Essentially, buyers can sit on the shares and earn a big dividend while waiting for price appreciation potential down the road.
Even being super conservative and assuming an earnings growth rate of only 4%, we can approximate long-term returns of close to 11% thanks to BNS’s big dividend.
Franco-Nevada stock
Franco-Nevada (TSX: FNV) stock has recently been thrown away by the market. The stock seems to be working on bottoming, but it might not be there yet. More consolidation or a big move up may be needed to prove that it is turning around before investors would jump back in. Contrarian investors, though, might start a position here.
At the recent price of about $148, it trades at a P/E of about 32.1. This looks like a high multiple, right? Not for the stock. Its long-term normal P/E is closer to 54! Apparently, the diversified royalty company, which is primarily in gold, commands a premium valuation because of its low-risk business.
For example, it doesn’t run any mines, so it has zero chance of mine cost overruns. However, as we saw in the latest correction of the gold stock, it had a risk playing out. The correction had to do with its exposure to its top stream, Cobre Panama, which contributes about 22% of its revenue for 2023 (up to the third quarter, or Q3). The mine is currently under preservation and safe maintenance. Franco-Nevada invested about US$1.36 billion in the asset from 2015 to 2019. And by the end of Q3 2023, it got paid back 50% of the investment.
It’s important to note that because Franco-Nevada has 115 producing assets, it remains profitable and free cash flow positive. Furthermore, it has growth potential from 43 advanced projects and 275 exploration projects. And if the Panama mine reopens in the future, the gold stock should zoom back to the $190 level fairly quickly.
The 12-month consensus analyst price target at TMX is actually $199.23, which represents a sweet discount of close to 26%. The stock also pays a growing dividend, although it only yields 1.2%.
