Contrarian picks that promise big profits

Each week, a professional investor tells us where he'd put his money. This week: Alec Cutler of Orbis GlobalBalanced Fund finds three stocks ripe with opportunity.

Buying cheap stocks and holding onto them for a very long time is a winning investment strategy. While this may sound obvious, investors aren't stupid and cheap stocks are often cheap for a reason.This is the challenge for contrarian investors. In times of extreme negativity, a company might appear uninvestable at any price. Take a closer look, however,and there may be an opportunity investors have missed.

A transformed oil major

The result? BP is now growing production with lower spending, and the barrels from new projects are more profitable than the barrels they replace, resulting in much higher free cash flow. Yet the stock is still priced at a near-6% dividend yield and 14 times consensus earnings for 2019, reflecting ongoing pessimism about the industry.

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Take a long-term view of AbbVie

While this blockbuster drug drives considerable earnings and cash flow for AbbVie, the market is concerned about how AbbVie will grow once it loses US patent protection on Humira in 2023. Instead of maximising sales of Humira through to 2023, AbbVie will intentionally cannibalise Humira revenue with its two new drugs, which are proving to be more effective than Humira.

We believe that cannibalising in return for longer patent protection is the right strategy for the long term, but realise that this is likely to make for a bumpy ride in the short to medium term. We are happy to wait. At less than ten times our 2019 earnings estimate and a yield of 5.3%, AbbVie currently has one of the lowest valuations and highest yields in the sector, despite industry-leading earnings growth and one of the most active and promising late-stage drug pipelines.

Investors ignore Bayer's benefits

In addition, the seed business has profited from decades of investment and research into product development, which have made it very difficult for rivals to gain a foothold. Bayer also has a high-quality pharmaceutical business; at eight times consensus earnings for 2019 for the company overall, the market is clearly ignoring that too.

Indeed, we believe the market is overestimating the costs of the Roundup affair. The current price implies the settlement would be more than £700,000 per plaintiff, which is well above the pay-outs for similar suits in the past, and in our opinion highly unlikely.