3 stocks primed to outperform

Here are 3 out-of-favour stocks whose share prices could be poised to rally.

Sometimes the best place to look for companies that will outperform in the future is to look at companies that have a record of outperforming in the past but for one reason or another have underperformed in the recent past.

This style of investing is often described as ‘contrarian’ and it’s not easy! The reason it’s not easy is it goes against human nature to ‘go against the crowd’ and to buy shares of a company when other investors are selling. Contrarian investing requires independent thinking and conviction — 2 traits Warren Buffett has mastered and that many other investors have not.

As the chart below shows, the following three blue-chip stocks have all underperformed the 6% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past six months. While none of these blue chips have announced any ‘life-threatening’ problems, each has ‘small negatives’ hovering over it, which is likely cause of their respective share price underperformances.

In insurer AMP’s (ASX: AMP) case, the 7% decline in its shares is due to a surprise downgrade to earnings in June that preceded its interim results release. The cause of the downgrade was poor claims and lapse experience in its Australian wealth protection business which caught the market off-guard and led to a selloff in the share price. While the share price has regained much of the recent losses it appears the market is taking a more conservative approach to the full year outlook for AMP.

Meanwhile, stock exchange operator ASX (ASX: ASX) has seen its share price nearly flat over the past six months, which is interesting when you consider the growing momentum for corporate activity such as initial public offerings and the market hitting multi-year highs. There isn’t really any ‘bad news’ to pin on the ASX, however a large discounted capital raising and a flat underlying profit are likely the reasons behind the recent relative underperformance of its shares.

Rounding out the three high quality companies whose shares have underperformed the index is implantable hearing device company Cochlear (ASX: COH). Cochlear was forced to downgrade market expectations in the lead up to its full year results due to weaker sales. Some analysts have become concerned that the company faces increased competition from rivals, however with the release of its new Nucleus 6 sound processor suite of products, Cochlear should continue to enjoy a strong growth trajectory.

tim

Source: Google Finance

Foolish takeaway

When a quality company stumbles it can be a great opportunity to purchase stock. The recent ‘stumbles’ at AMP, ASX and Cochlear have each led to their share prices underperforming the market and could offer a good entry point for investors into these blue chip companies that have good long-term prospects.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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