The simple fact is that the ASX shares that you bought when no one else loved them are the ones that have the most potential.
That's because if everyone else was also bullish on a stock, then the entry price would already have been very high.
This is where contrarian investing comes in. Buy the stocks that others have fled from, then wait for the rebound.
Investment outfit Allan Gray made its name from such a strategy, and its chief investment officer Simon Mawhinney recently described it as picking ASX shares that make you feel anxious about buying.
"If it's true that good investments often begin with an element of discomfort, then Lendlease Group (ASX: LLC) would fit the bill," Mawhinney said in a quarterly memo to clients.
'Share price performance has been woeful'
You can't get much more contrarian than the much-maligned construction company.
Over the past year, the Lendlease share price has plunged 16.3%, and it has dropped an awful 60% if you go back five years.
"Lendlease's share price performance has been woeful and makes the performance of the Small Ordinaries Index look like that of an artificial intelligence chip designer."
Allan Gray analyst Tim Morrison listed a sickening list of reasons why investors have pulled their money out of Lendlease over the past decade, including engineering project losses, aggressive accounting, real estate value decline, and balance sheet concerns.
"Returns to Lendlease's shareholders have been spectacularly poor," he said.
"But we believe there is cause for some optimism."
The underperforming engineering business was sold off in 2021, the capital base has been written down, and cost reductions are underway.
"Several sale processes are in advanced stages of execution that, together with earnings retentions over the coming years, should help the company reduce its debt burden."
This underperformer only has to improve slightly for share price to rocket
But the biggest ace up Lendlease's sleeve, according to Morrison, is the dirt cheap share price.
He noted how the company is aiming for an after-tax return on equity of somewhere between 8% to 10%, which is roughly a profit of $600 million.
"At its current price, investors are paying nine times these targeted earnings," said Morrison.
"To be on the same earnings multiple as the broader share market, Lendlease only needs to deliver a 5% return on equity, compared to its target of 8% to 10%."
So if the company can hit its modest targets, most of the risk for the share price is on the upwards.
"We believe there could be significant upside if Lendlease management is able to deliver on its targets and, in our opinion, relatively more modest downside if it doesn't."
