## **Contrarian Stock Screening Criteria** These criteria are inspired by Bolton’s **"Special Situations"** investing framework, which focuses on undervalued, out-of-favor stocks with catalysts for re-rating. ### **1. Valuation Metrics (Look for Cheap Stocks Relative to Fundamentals)** - **P/E Ratio (Price-to-Earnings):** Low compared to industry peers and historical averages. - **P/B Ratio (Price-to-Book):** Below 1.5 or significantly below sector median. - **EV/EBITDA (Enterprise Value to EBITDA):** Below 7, preferably under 5. - **Price-to-Free Cash Flow (P/FCF):** Less than 15, or a stock with increasing free cash flow but a stagnant share price. ### **2. Market Sentiment & Mispricing (Look for Neglected or Hated Stocks)** - **52-Week Lows:** Stocks trading near or at their 52-week lows. - **Underowned by Institutions:** Check 13F filings to see if institutions are reducing exposure. - **Low Analyst Coverage:** Prefer stocks with **few analysts covering them** or recent downgrades. - **High Short Interest:** Stocks with **high short interest** (over 10%) but improving fundamentals. - **Recent Spin-Offs or Demergers:** Companies that were spun off and overlooked due to forced selling by index funds. ### **3. Asymmetry & Catalysts (What Will Change the Narrative?)** - **Restructuring or Turnaround Story:** Look for companies implementing cost-cutting, divestitures, or leadership changes. - **Hidden Asset Play:** Companies with valuable assets (real estate, patents, subsidiaries) not reflected in the stock price. - **Special Situations (Event-Driven Opportunities):** - M&A targets or post-merger mispricings. - Companies undergoing strategic shifts. - Legal overhangs that, once settled, could lead to rerating. - **Earnings Inflection Point:** Stocks with improving earnings trends but still priced as if in decline. ### **4. Financial Health & Balance Sheet Strength** - **Debt-to-Equity Ratio:** Preferably under 1.0, or a recent deleveraging event. - **Interest Coverage Ratio:** Above 3x to ensure the company can cover its debt obligations. - **Operating Cash Flow vs. Net Income:** If operating cash flow is consistently higher than net income, it signals earnings quality. - **Insider Buying:** Recent insider purchases indicate management confidence in future performance. ### **5. Technical & Market Dynamics** - **Volume Spike After Extended Decline:** A sudden increase in trading volume after a prolonged downtrend. - **Negative News Overreaction:** Stocks that have sold off heavily due to temporary bad news but have strong fundamentals. - **Low Correlation to Broader Market:** Stocks that behave independently from major indices (e.g., niche industries, turnaround stories). --- ## **Contrarian Investment Checklist** Use this **checklist** before making a contrarian bet: ### **Step 1: Identify the Market Mispricing** ✅ Is the stock trading at **low valuations** compared to historical and peer-group averages? ✅ Has **sentiment turned negative**, and are investors **ignoring or avoiding** the stock? ✅ Are analysts cutting ratings, yet **fundamentals show potential for improvement**? ### **Step 2: Assess the Potential for Asymmetric Returns** ✅ Does the company have **hidden value** (e.g., real estate, IP, brand strength) that’s underappreciated? ✅ Is there a **clear catalyst** (earnings recovery, leadership change, M&A, asset sale) to drive a turnaround? ✅ Does the stock have **low downside risk** due to strong financials or a margin of safety? ### **Step 3: Evaluate the Financial Strength** ✅ Is the balance sheet **strong enough** to survive near-term headwinds? ✅ Does the company generate **free cash flow**, or is it dependent on debt? ✅ Are insiders **buying or holding** rather than selling? ### **Step 4: Check Behavioral & Market Signals** ✅ Is the stock hitting **52-week lows** but showing signs of stabilization? ✅ Has short interest **peaked**, indicating a possible short squeeze? ✅ Has the stock been **neglected by institutional investors**, but now showing accumulating volume? ### **Step 5: Assess the Risks** ✅ Are there any **structural issues** that could permanently impair the business? ✅ What are the **key bear arguments**, and are they overblown or misunderstood? ✅ Is this a **value trap**, or is the business genuinely improving? --- ## **Final Thoughts** This framework **mimics Bolton’s approach**—hunting for stocks that are **unloved, mispriced, and poised for a turnaround**. The goal is to find companies where sentiment is too negative relative to **real fundamental value and catalysts**. The best contrarian bets are **not just cheap stocks** but those with **specific reasons for re-rating** in the near future.