Being a contrarian pays off in stock portfolios in first quarter

Going against the crowd is becoming a rewarding strategy for U.S. stock investors after a period of poor performance, according to Thomas J. Lee, managing partner and head of research at Fundstrat Global Advisors. The Dow Jones U.S. Contrarian Opportunities Index (which, according to Dow Jones, measures "the performance of stocks that lag behind the broader market in terms of recent performance, but that outrank their peers based on fundamentals-based and other qualitative criteria") rose more in the first quarter than an equally weighted version of the Standard & Poor's 500 Index. The Dow indicator, consisting of 125 stocks with equal weights, trailed in 12 of the previous 15 quarters. (See chart for detailed comparison.) (Related read: Bruce Berkowitz sticks to contrarian guns as investors exit Fairholme Fund) The stage has been set “for contrarian-style investments to sustain outperformance,” Mr. Lee wrote in an April 2 report that had a similar chart. The New York-based strategist cited three reasons why the reversal will last: • Increased dispersion, or variation in the returns for individual stocks. Monthly dispersion for the shares of S&P 500 companies dropped in August to the lowest level since 1979, data compiled by JPMorgan Chase & Co. and Bloomberg show. • More obvious second-half gains for companies aided by lower oil prices. Crude oil's average price last quarter in New York trading declined 51% from the first three months of last year, to $48.57 a barrel. • A “potential breakout” in U.S. housing and another in capital spending. February housing starts were 60% lower than the record set in January 2006, according to data compiled by the Commerce Department. Capital outlays slumped this year amid cuts at energy producers. Stocks in the Dow index have trailed the market while surpassing peers on earnings, revenue and other criteria. They are selected from the Dow Jones U.S. Broad Stock Market Index, which has shares of about 2,500 companies.