Warren Buffett is widely recognized as one of the most successful investors of all time. His investment philosophy, which often goes against prevailing market trends, epitomizes contrarian investing. His conglomerate holding company Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) has recently sold about half of its holdings in Apple (NASDAQ:AAPL) stock, among others. In other words, he has gone against investors who have been cheering mega-cap tech shares despite high valuation levels.
Yet, contrarian investing is not for the faint-hearted; it demands a sharp eye for undervalued assets and the ability to ride out market fluctuations. However, for those who master this approach, the rewards can be substantial. With strong fundamentals offered by these shares, investors can position themselves for potentially impressive returns. With that in mind, here are three intriguing contrarian stock picks for patient and discerning investors.
Baxter International (BAX)
We begin exploring top contrarian stock picks with Baxter International (NYSE:BAX), a global heavyweight in the medical technology (medtech) sector. The company has a diverse portfolio of healthcare products in critical care, kidney care and surgical settings.
In the first quarter of 2024, Baxter reported a 2% year-over-year (YOY) revenue increase to $3.6 billion, slightly surpassing estimates. Adjusted EPS was 65 cents, reflecting a 10% YOY growth. However, Baxter’s focus on essential, low-priced medical supplies has limited its pricing flexibility, affecting profit margins.
To enhance profitability, the company plans to divest low-margin businesses, including its Kidney Care segment, valued at over $4 billion. Recent FDA approvals for innovative products like the Novum IQ infusion pump and Dose IQ Safety Software are expected to drive future growth. Despite positive indicators and management raising EPS guidance for the year, concerns about profitability and strategic restructuring have led to a 9% decline in BAX shares year-to-date.
Nevertheless, the stock offers a 3.3% dividend yield and trades at attractive valuations of 11.9 times forward earnings and 1.2 times sales. Analysts project a 22% upside potential with a 12-month median price target of $43.00, positioning Baxter as a strong contrarian investment opportunity in the recovering medical technology market. Baxter will report its second quarter 2024 earnings on August 6.
Nike (NKE)
Next on our list of contrarian stock picks is Nike (NYSE:NKE), a powerhouse in athletic footwear, apparel and equipment. Despite its strong global brand and innovative products, Nike faced challenges in its recent fourth quarter fiscal 2024 earnings report.
The company posted $12.6 billion in revenue, a 2% YOY decline that missed expectations. Management cited difficulties in the Chinese market, a slowdown in lifestyle sales and inconsistent consumer trends as contributing factors. On a positive note, adjusted EPS came in at 99 cents, reflecting a remarkable 50% increase from the previous year. Despite these headwinds, Nike has demonstrated resilience, reporting an 11% YOY decline in inventories and expanding its gross margin by 110 basis points to 45%.
While management anticipates a mid-single-digit revenue decline for fiscal 2025, analysts believe actual sales could exceed this guidance due to robust consumer confidence. Additionally, Nike is reinvesting nearly $1 billion in consumer-facing initiatives, including marketing efforts for the Paris Olympics.
As a result, NKE stock has plunged 32% since January. Currently, it offers a 2% dividend yield. Shares now offer better value relative to historical averages, trading at 23.9 times forward earnings and 2.2 times sales. Meanwhile, analysts have set a 12-month median price forecast of $91.00 for NKE stock, projecting a potential 23% upside.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) stands out as a compelling contrarian stock pick in the oil and gas industry. Despite declining prices, continuing geopolitical tensions and a shift toward renewable energy, Occidental’s diversified assets, particularly in the Permian Basin and offshore Gulf of Mexico, position it for potential outperformance.
In the first quarter of 2024, Occidental reported a 17% YOY revenue decline to $6 billion. Adjusted diluted EPS was 63 cents compared to $1.09 in the prior-year quarter. However, the company is strategically enhancing free cash flow and shareholder returns. Recently, it completed the CrownRock acquisition. The move is expected to improve operational efficiency and bolster further growth. Additionally, Occidental announced the sale of certain Delaware Basin assets for $818 million, with proceeds aimed at debt reduction. The company also focuses on transitioning to alternative energy and carbon management through direct air capture (DAC) investments and other innovative technologies.
Despite a 3% YTD decline, OXY stock offers a 1.5% dividend yield. The shares are changing hands at attractive valuations of 16.6 times forward earnings and two times sales. Wall Street analysts project a 27% upside potential, with a 12-month median price target of $73.00, making Occidental a compelling contrarian investment in the energy sector. Occidental will report its second quarter 2024 earnings on August 7.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.