3 Stocks to Buy for Contrarian Opportunities

• Sometimes, when looking for the best stocks to buy, it pays to go against the grain.
• Teladoc (TDOC) has dropped into the abyss, but is set for a contrarian bounce.
• Netflix (NFLX) has suffered due to subscriber loses, but that doesn’t negate the company’s success.
• Shopify (SHOP) may be presenting a rare opportunity for smart money.

Wall Street investors are having a crisis of confidence. Usually the fears stem from shallow topics, but this time there are good reasons. The current worries are not because investors are fretting frivolous details. This time, the threats can legitimately carry serious repercussions. Nevertheless, among the uncertainty, I am still seeking opportunities in extremely out-of-favor stocks to buy.

It is human nature to follow. If we see hordes running out of a building, our instinct is to do the same. While this is good instinct for survival, it is terrible for investing. Consider Meta Platforms (NASDAQ:FB) stock this week. It has been under pressure from fears of a nasty earnings report reaction. It sold off into its report on Wednesday, and that turned out to be a mistake. Those who took the time to investigate the FB opportunity won big in mere minutes.

This is the logic that fuels my need to seek contrarian stocks to buy. I didn’t invent this approach, in fact others have used it for decades. The most famous investor of all time, Warren Buffett, coined a phrase for that. He suggests being brave when others are panicking in fear. Of course my process is not a free-for-all. I have parameters that help protect me from unnecessary drama. There is a fine line between being brave and smart, versus being blindly contrarian.

Sometimes the prevailing concerns are real worries, and there isn’t an opportunity there. My list of out-of-favor stocks to buy will likely draw criticism from many experts. But that’s part of its charm. Otherwise, I would not be picking something that’s under the radar. If everyone agrees with me, then the current stock price already reflects much of the opportunity. I aim to find gems that most have missed.

Teladoc (TDOC)

Teladoc (NYSE:TDOC) reported earnings last night and investors hated what they saw. So they sent it back down to its IPO levels down more than 40%. The metrics were horrid from all angles. The accounting included massive goodwill write downs, which is never an easy concept to grasp. The bottom line is that they made an investment and they overpaid for it. In addition, management also missed their revenue benchmarks. To make matters worse, they also noted that this will continue forward this year. Blaming a longer closing cycle didn’t stop investors from hitting the sell button hard.

So why the heck am I considering betting on some upside from here? I believe in the concept of telehealth beyond the pandemic. Teladoc has a good thing going, the company just needs to refine it. At some point, there is value in the business. I am not suggesting to blindly jump with a full position. When a stock falls this hard, it often lasts more than one day. The selling may persist a bit, since margin calls can last three days. Large investors may need to sell stock to cover their losses.

There are two ways to mitigate these risks. I prefer using options to catch a falling machete like this one. There I can sell a put lower so to leave room for error. If options are too scary, then I would simply take a partial position. This would make it possible to manage the risk should the selling persist. If I am long the stock already, I likely missed the opportunity to panic out now. And unlike ARK did, I would certainly not add to the position. Averaging down merely makes a problem bigger.

Netflix (NFLX)

Similar to TDOC, Netflix (NASDAQ:NFLX) had its crash moment last week. The company reported numbers that also disappointed investors in a big way. NFLX has fallen almost 50% since then. I would even expect that there could be more pain but not much. The same concept I shared for TDOC works here too. I don’t want to panic out of my shares now if I am already long. Investors who are in it already are now virtual prisoners for a while.

The good thing is that Netflix still has a great business going. What they did wrong is miss the performance metric expectations. Investors had a high bar for them and had too narrow a focus. For years, NFLX stock rallied on subscriber growth. The company modified it a bit over time, but in general it accepted the higher valuation for the sake of growth. But during its earnings call it pretty much killed that concept. The user metric actually shrunk, which hasn’t happened in a decade.

Moreover, the game-changer message came from management, suggesting that the weakness may persist. Even if the reasons for this are temporary, the stock has actually lost its fuel. Therefore, Wall Street will reprice it according to its new reality. This would explain the giant drop to bring it in line with a non-growth company.

However, this doesn’t change the fact that the company has a successful business. The largest chunk of the growth premium is likely already out. So there might be upside from here, even if from a proverbial dead cat bounce. Owning shares for the long term should make financial sense. But just like with TDOC, I would only make it a partial position first. I would also favor using options to create room for error with NFLX stock.

Shopify (SHOP)

Unlike the other two stocks to buy, Shopify (NYSE:SHOP) stock is not falling on a single event. Also its management has not fallen short on any metric. In fact, SHOP is a rare success story that closely resembles that of Amazon (NASDAQ:AMZN). The financial success that the company has had is proof that it is executing well on its plans. Revenues are up seven times in five years. Moreover, the company is achieving this while being frugal, which is a tall order.

Last year management delivered a $2.9 billion net income. During a rising rate cycle, it’s important to know that Shopify generated more than $500 million in cash from operations. This means that it can continue growing without needing to borrow much. However, despite all of those accolades, SHOP stock has lost 75% of its value since last November. That is an astonishing metric, even if the rally that brought it to its highs was excessive.

It may be obvious that this is a special company, but it still isn’t finding love on Wall Street. This is why I am suggesting taking a leap of faith that SHOP will eventually fall back in favor. In fact, according to Yahoo Finance data, the analysts agree. Their average price target for it is three times the going rate. With or without their blessing, I would bet that SHOP stock will out-perform the S&P 500 long term.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.