Buying stocks after they've been punished by other investors is a form of contrarian investing. Buying them while they're being punished is financial masochism.
The difference is one of price momentum and its immediacy. Several respected studies, beginning with a landmark 1993 paper by Narasimham Jegadeesh and Sheridan Titman titled "Returns to Buying Winners and Selling Losers," have shown that in the short term, price momentum in a certain direction predicts more of the same. That is, stocks that underperformed last month are more likely than not to do so again this month. Contrarian investors, while looking for past underperformers that now sport alluring valuations and turnaround potential, would do well to look for a touch of recent price momentum, too.
The three companies below were in the bottom 25% of S&P 500 members by share price performance over the past five years but were in the top 25% over the past few months. Each has reported operational improvements lately, and each seems reasonably priced. (more)
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