2 beaten-up shares for the contrarian investor

If you read the financial press you’ll have seen increasing talk of ‘contrarian plays’ or ‘buying unpopular stocks’ in order to find greater returns. Although this means by definition buying businesses that others in the market won’t touch, it doesn’t mean buying bad businesses.

Rather, investors are looking for a business facing some struggles plus a clear ‘story’ about how those struggles might be mitigated.

Here are two stocks that could be ripe for a contrarian investment today:

Thorn Group Ltd (ASX: TGA)

Thorn Group is a niche consumer leasing and finance company whose share price has been pummelled over the past 12 months by investor concerns regarding an Australian Securities and Investment Commission (ASIC) investigation as well as business underperformance.

Management has recently decided to jettison the underperforming debt collection and consumer loans businesses in order to refocus effort on the core Consumer Leasing and Business Finance markets. While this hurt results in the near term due to write-downs, as Thorn returns to what it does best it should see a corresponding improvement in its operations.

The ASIC investigation remains a concern but it appears adequately reflected in the share price, and Thorn is well funded enough to deal with adverse findings against it. Thorn also sports a large dividend that appears sustainable.

Tower Limited (Australia) (ASX: TWR)

Tower is another interesting play, as a small insurer that has been battered by higher claims costs, write-downs on its IT systems, and low margins. The company appears adequately funded to handle reinvestment in IT as well as additional claims that might crop up, and currently trades at a ~20% discount to its Net Tangible Assets. Additionally, Tower has announced it will maintain its dividend payout level in line with last year, which will lead to big yields given the fall in the share price. This dividend appears to be affordable given the company’s current balance sheet.

One possible warning sign is that a director and the Chief Financial Officer (CFO) both resigned in recent months, and both after just two years of service. Additionally, Tower shares are trading well below the $1.26 price level at which a competitor was making unsolicited bids to Tower shareholders some six weeks ago. If Tower maintains its operations it may prove attractive at today’s prices, although the risks should not be overlooked.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Sean O'Neill owns shares of Thorn Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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