Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals. The below article was written by Fidelity Worldwide Investment.
The latest trends have been on show at London Fashion Week, but it doesn’t always pay to follow the crowd; at least when it comes to investing in the stock market.
Fashionable, popular companies create considerable demand for their shares, and generally high expectations for company performance. This means that should the company encounter problems that disrupt its earnings, and the market's expectations prove incorrect, then their shares potentially have a long way to fall.
On the other hand, shares in companies that are out of favour, where expectations are low, generally have less scope for a significant fall in share price. In addition, and more importantly, these shares have much more scope for a significant upside swing, particularly if a turnaround is on the cards.
Sanjeev Shah and Alex Wright, two Fidelity portfolio managers who have had success following a contrarian approach, have identified four stocks that are currently out of fashion among investors but which they believe are set for a revival. These stocks are Mothercare (MTC), Speedy Hire (SDY), 
Lloyds Banking Group (LLOY), and Ladbrokes (LAD).
Mothercare (MTC)
“Mothercare was previously a darling of the stock market due to its impressive overseas growth programme," said Alex Wright, portfolio manager of the Bronze-rated Fidelity UK Smaller Companies Fund (Morningstar Analyst Fund Research). "The value of its shares fell dramatically from grace in 2011 after a succession of profit warnings relating to its embattled UK business. However, following a change of management, I now believe that they have a credible strategy to reduce costs and return to profitability. This outcome is not currently reflected in the company's share price, which should improve as the company addresses its problems at home.”
Speedy Hire (SDY)
“Speedy Hire commanded a share price above £10 during the construction boom years leading up to 2008. The company now trades at less than 50p, but has potential to deliver strong returns from this level," said Wright. "Such was the negativity surrounding the stock that you were able to buy its shares for less than the value of its equipment. This level of downside protection is very attractive to a contrarian, value investor like me. With the competitive environment moving strongly in favour of Speedy Hire, the share price has begun to recover, and should continue to do so.”
Lloyds Banking Group (LLOY)
“You could hardly have lived in the UK through the last five years without realising that the banking sector has fallen well out of favour with the public, politicians, and investors," said Sanjeev Shah, portfolio manager of the Silver-rated Fidelity Special Situations Fund (Morningstar Analyst Fund Research). "Even after a strong performance in 2012, shares in Lloyds trade below their book value. Investments in Irish property and HBOS have turned sour, but even if you write these down very conservatively, you are left with an attractive amount of upside. Lloyds is an excellent example of a company where negative publicity and history obscures what could well prove to be a bright and profitable future. In particular, it currently has a 30% market share in traditional corporate and retail banking, and a recovery in these areas will mark a significant improvement in its profitability.”
Ladbrokes (LAD)
“Having been left behind the pack in the race to online betting platforms, Ladbrokes has been out of favour in the market for some time, with investors preferring the more advanced online and mobile offerings of William Hill and Betfair, for example," said Shah. "However, with shares looking cheap on 10.5 times next year’s earnings, recent investments in online and a restructuring of the company’s vast retail estate beginning to bear fruit, it is possible that the company is embarking on a period of positive change.”
Both Wright and Shah attribute much of their success to their contrarian strategy of preferring to invest in companies that have fallen out of fashion among the rest of the market.
The original version of this article was issued by Fidelity on February 13, 2013.
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Fidelity Disclaimer
Any opinions expressed are made at the time of writing and can be subject to change without notification. Reference to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity.
