Greetings from Team Carnelian !!
“History demonstrates that investors who buy stocks that are out of favor and avoid stocks that are in favor will enjoy superior results over the long term.”
- David Dreman
Markets have corrected 12% from the peak; mid and small cap indices have corrected ~13% -16%. Many stocks have corrected even further by ~30-40%. To us, the current environment is a reminder of the first quarter of 2022, just around the start of the Ukraine war. At the onset of 2022 markets were sitting on handsome gains, Ukraine war opened geopolitical uncertainty and a huge energy crisis in Europe which led to a 40-yr high inflation across the Western World. During those uncertain times, we had launched a differentiated strategy – “Carnelian Yield n Growth Strategy” (CYnG) suitable to the prevailing economic & market conditions then. It was a strategy to buy undervalued, yield generating assets which were likely to benefit in inflationary times. While that strategy had few takers, it delivered a stellar 34.3% CAGR returns with 20% CAGR alpha over the last 3 years (since inception in Jan 2022) with a lower risk profile. Post the significant run up in our portfolio stocks, dividend/FCF yields have gone down and it became difficult to identify new ideas offering lucrative dividend/FCF yield. Hence, we had stopped taking fresh funds into this strategy for the last 1.5 years.
In line with our previous note (2025 – Year of keeping low expectations and staying disciplined) and like we mentioned above, the current market environment seems similar to 2022. We think owing to the Trump administration, tariff wars, currency devaluations and changing global interest rate environment, markets can remain difficult this year. Such an uncertain environment creates significant investment opportunities due to a drift created between the price and intrinsic value. Market inefficiencies arise because investors react emotionally to uncertainty, often leading to mispricing. Investors with a contrarian mindset can capitalize on this by buying against the consensus. Through our analysis and past experience we have seen these uncertain environments create huge wealth creation opportunities for Contra investors who dared to swim against the tide. We see interesting contra investment opportunities in banking and financials, capex-oriented sectors, chemical, consumer durables, real estate & building material, ER&D etc.
Hence, we have decided to re-open for investments our CYnG strategy with a broadened perspective as the Carnelian Contra Portfolio Strategy (CCPS). We believe this vintage will make good money just like it did in 2022. (read)
The idea of CCPS is to capture opportunities arising out of:
Structural growth story with a temporary dislocation – e.g. Infosys post Vishal Sikka’s exit; Coforge during acquisition of Cigniti. Both stocks delivered multifold returns post the initial correction.
Deep value stocks – e.g. Coal India, ITC were available at single digit valuations due to ESG concerns
Businesses facing unfavorable cycle – e.g. ER&D during Covid, Pharma during the US down cycle
Special situations like mergers, open offer, acquisitions etc.- e.g. Eureka Forbes, KPIT
Why contra strategy?
Humans have an innate tendency to overreact, and this is largely due to our evolutionary survival mechanisms.
“Be fearful when others are greedy, and greedy when others are fearful” - Warren Buffet
Market tends to react to various news and events, at times rationally but in extreme situations tends to overreact irrationally on account of:
Investor psychology (behavioral biases)
Greed & fear: investors panic-sell in downturns and chase momentum during rallies
Herd mentality: people follow the crowd, amplifying price movements
Recency bias: overweighing recent news while ignoring long-term trends
Loss aversion: fear of losing money causes exaggerated sell offs
News & events
Earnings announcements: a slight miss in expectations can trigger a big sell-off
Macroeconomic data: inflation, GDP growth, or rate hikes often lead to exaggerated moves
Geopolitical events: war, policy changes, or global crises cause knee-jerk reactions
What is contra investing?
Contra investing is an investment strategy where investors take positions that go against the prevailing market trends and/or popular sentiment. It is about having an independent absolute approach with a strong belief on the fundamental aspects of the underlying asset/sector/stock. One needs to have a deep understanding about the company/sector and conviction as the same is contrary to popular view. In our view, the following situations form part of contra investing:
Buying during market panics/ stock panic situations
Buying once overhyped stocks / IPO frenzied stocks post correction
Investing in out-of-flavour stocks
Overly bearish sentiment for a sector/region/country
Buying deep value stocks in cyclical downturn
Historical examples of contra investing
History highlights numerous examples of a drift between intrinsic value and stock prices creating huge opportunities for a rational investor:
Apple – In the late 1990s/early 2000s Apple was struggling - nearly went bankrupt and was considered irrelevant in the PC market. Investors who bought Apple before Steve Jobs’ turnaround (introduction of the iPod, iPhone, and Mac resurgence) saw massive long-term appreciation. Apple’s market-cap went up from USD 2.3bn in Sep 1997 to ~USD 100bn when iPhone was introduced in 2007.
Amazon – Amazon’s stock crashed over 90% during the Dot-Com Bubble burst, dropping from ~USD 107 to below USD 10. Many assumed e-commerce was dead. Investors who believed in Amazon’s long-term potential and bought/held the stock then saw it become a trillion-dollar company.
BoFA - During the 2011 challenges of Bank of America, the stock had corrected on account of 2008 baggage and the acquisitions of Countrywide Financials & Merrill Lynch. Warren Bufftet invested USD 5bn in preferred shares, the stock has given ~6.5-7x returns since then.
In the Indian context also, we have seen this happen…..
Infosys – The stock corrected in 2017 post the exit of Vishal Sikka. Market sentiments turned negative with fear of uncertainty over leadership. Those who bought during this panic benefited as the stock rebounded under the new leadership of Salil Parekh, driven by consistent earnings growth and digital expansion. Infosys delivered ~18.8% CAGR since then.
Sun Pharma – During the US pharma down cycle, Sun Pharma was down ~60% from 2015 to 2019; the cycle had a big reset post covid - backed by its investment in the specialty portfolio, it went on to become 4x over the next 5 years.
Coforge – In the recent example, investors dumped Coforge’s stock citing a bad acquisition specially its funding done via equity capital raise. Management delivered and synergies are emerging beyond initial expectations! The stock has almost doubled in just ~8-10 months from post-acquisition announcement impact.
LTTS – During Covid times, market believed ER&D spends would dry out – consequently top-notch companies like LTTS were available at 15x one year forward valuations. Things emerged very differently for the ER&D space; LTTS’ stock went on to become ~4-5x in a matter 2-2.5 years.
At a sector level as well, massive wealth creation happened when the sectors moved from “out-of-flavour” to “in-flavour”.
Conclusion
Contra investing is having an independent absolute return approach with a strong belief on the fundamental aspects of the underlying asset/sector/stock. One needs to have a deep understanding and a sense of conviction as it is investing beyond consensus.
As explained earlier, we believe the current market conditions are ripe for investing in the Carnelian Contra Portfolio Strategy. The above-mentioned framework in addition to our CLEAR and CONNECT filters will form the basis of our portfolio construction.