5 Best Contrarian Stocks to Buy Now for Massive Upside After The Bear Market

To outperform the average stock market (S&P 500) return, you need to have a different mindset than the average investor. The average investor will buy high and sell low the most hyped up, popular investments. Sometimes, the best performing investments are the assets and stocks that nobody is paying attention to--possibly oversold investments that the market is currently pessimistic about but have massive upside potential. The most lucrative investment opportunities of your life will often be the stocks that you take the contrarian view on despite all odds and the negative consensus.

Below are some of the best contrarian stocks to consider in this bear market. While the bear case and negative sentiment is valid for these stocks below, and some of these stocks deserve a low valuation, if you are an early investor and the bear case turns out to be wrong, then these stocks will create fortunes over the next five to ten years.

Offerpad/Redfin/Opendoor (OPAD, RFDN, OPEN)

I am cheating by putting three companies under one entry on this list; however, these stocks all fall under the same contrarian theme. With record high inflation today and the federal reserve combating inflation by increasing federal interest rates, the United States is predicted to fall into a deeper recession over the next year or two. As the economy possibly crumbles, so, too, will the housing market. As higher federal interest will cause mortgage rates to skyrocket, higher unemployment coupled with conservative spending will dampen consumer demand for buying houses.

If you've ever tried to sell a home, then you know that the process of putting the home on the market to the settlement of the sale is a long, tedious process that can take months. Offerpad and Opendoor are disruptive companies in the real estate industry, an industry ripe for innovation.

What Offerpad and Opendoor have in common is that these companies engage in a new trend called “iBuying." iBuying is when companies purchase homes directly from sellers, renovate them, and try to flip the properties for profit. iBuying companies use algorithms and data models to give fair, online cash offers in minutes. Real estate is one of the most illiquid assets, which can be frustrating if you are trying to sell quickly. This seems like the future of selling real estate as a stress-free alternative. There are many home sellers who would rather receive cash within days and pay less fees rather than find a trustworthy agent and endure listing the home and scheduling showings. There’s no doubt that iBuying will take market share from the traditional real estate experience over the next decades.

Currently, the stocks of these companies are trading at some of their historically lowest valuations and prices per share. This is due to the economic climate we are now in where mortgage rates, consumer demand, and the overall housing market are under fire and will likely worsen during this recession. iBuying as a business model is also not without risks. Zillow was one of the strongest competitors to these companies, especially in the iBuying space, but Zillow ended its iBuying business in 2021 due to issues the company had pricing its homes accurately. Redfin just reported on 11/9/2022 that it would be ending it's iBuying program, RedfinNow. This emphasizes the concern of iBuying as a business. Can it be sustainable or profitable, especially in market downturns?

However, the U.S. real estate market is worth trillions of dollars and is resilient in the sense that the real estate market has recovered from every market crash, including the 2007/2008 real estate bubble. There will always be demand for purchasing homes, and real estate is guaranteed to recover in the long term.

If iBuying seems too risky to you, then investing in more traditional real estate companies such as Redfin and Zillow are a great way to play the real estate recovery now that both companies ended their iBuying businesses. Redfin has the more diversified business model, offering full residential real estate brokerage services. Sellers can list homes for sale with the help of a real estate agent, and commission fees are often less than 2%. The company offers a platform where buyers can research homes and pay equally low commission fees that are much lower than the industry average.

Opendoor, Redfin, and Offerpad are already priced for failure, and the stock bear market has seemingly priced these stocks as if the companies will go bankrupt. The stocks trade at price-to-sales ratios of 0.11, 0.17, and 0.047, respectively, as well as close to or below book value. These are high-risk, high-reward investments that are not guaranteed to succeed, but it’s possible that the negativity is getting extreme here. If you believe that the real estate market will eventually recover and that there is legitimacy and value in iBuying businesses, then it may be prudent to take a small position in these companies. If these companies can weather the market downturn and prove that iBuying can be very profitable long term if executed well, then these stocks may generate small fortunes if bought at these valuations. The housing market is such a vast market opportunity, and these stocks may soon be screaming buys for contrarian investors.

Docusign/ Zoom /Teladoc (DOCU/ZM/TDOC)

This is another entry on this list with multiple companies that fit under the same contrarian theme. First, Docusign is the leader of e-signatures and electronic agreements management. Zoom needs no introduction as the market leader of cloud-based communications. Teledoc is one of the largest public telemedicine and virtual healthcare companies.

These companies soared during the pandemic for obvious reasons as we were all forced to stay home, and there was an abrupt shift to remote work and telemedicine when possible. However, investors have written off these “pandemic stocks” in this post-pandemic world as the global economy reopens and COVID-19 cases are subsiding. The general consensus seems to be that the best days for these companies are behind them and these companies will never see the 2020 levels of growth again now that business is being done more in-person. This is evident as investors have pushed these stocks down 80% or more from their all-time high stock prices at the time of this writing.

The question we need to ask ourselves is if the market’s thesis is wrong?

Sure, there will most likely not be another catalyst quite like the coronavirus pandemic to propel these companies to 2020 growth rates in the future; however, let’s not forget that remote work is a secular growth trend that will always persist, although perhaps at slower rates than during the pandemic. With the evolution of cloud-computing, there were more people working remotely prior to the pandemic than a decade ago. The pandemic surely exacerbated the remote work trend, but the trend caught on in 2020 and will most likely continue. Many workers enjoyed the flexibility and time-saving benefits of working from home, and now, most likely, will demand this option or consider this when choosing an employer. Many companies now offer at least a hybrid in-office, remote work schedule for their employees when possible.

A recent Upwork study showed that approximately 36% of the United States’ workforce will work remotely by 2025 which is an 87% increase from levels before COVID-19. If you believe that remote work is a trend that will continue into the future regardless of the pandemic coming to an end, then now is the time to buy shares of these companies at their current rock bottom valuations. If the stock market's theses for these stocks are wrong, being a contrarian investor in these stocks now will pay handsomely years from now.

Upstart (UPST)

Upstart is a company that uses artificial intelligence (AI) to originate loans for banks and other lenders. Upstart uses up to 1,600 data points to determine a person’s creditworthiness and works with banks to match borrowers with these loan offers. The AI algorithm makes most of these decisions instantly, which saves money for banks.

Banks and lenders have used the traditional credit scores such as FICO for decades as the gold standard in their lending models. The idea is that the FICO and other major credit scores look at only a few factors in determining an individual's creditworthiness, but there are so many other major factors that can help predict if a borrower is likely to default on a loan.

In fact, credit scores only consider five main criteria: payment history, length of credit history, types of credit used, the current level of indebtedness, and new credit accounts. People’s financial situations are more complicated than these five data points, and very often, people who are not approved for loans based on these criteria would otherwise not default on loan payments. Many people believe that traditional credit scores are inaccurate and too narrow, since credit scores assess so few aspects of a person. It’s possible that credit scores such as FICO are antiquated, obsolete lending models that are due for innovation and disruption.

Upstart’s mission is to replace the traditional credit scores by using thousands of non-traditional data such as education, residence, job history, and cost of living to determine someone’s ability to pay back a loan. In theory, Upstart’s model should be more accurate by adding variables other lenders usually don’t consider. Upstart’s goal is to approve more applicants, which creates more business and profits for banks, but also to have lower default rates for borrowers.

This is huge for investors because Upstart is targeting a massive market opportunity. There is a large, underserved population who would not normally qualify for funding with traditional credit scores, but are at a low loan default risk. There are so many potential customers for Upstart’s bank and lending partners who historically have been excluded from these financial services for the business to capitalize on. For instance, Upstart has approved 30% more minority applicants with interest rates that are 11% lower on average. As Upstart approves underserved borrowers in this modern economy with lower default rates compared to traditional credit scores, this should allow Upstart to partner with more lenders, which will attract more borrowers, resulting in more lending partners in a virtuous cycle.

So far, Upstart’s lending model seems to be successful in lowering default rates. The company claims on its website that its algorithms result in 75% less defaults than large banks in the United States.

The problem is that Upstart’s artificial intelligence has not yet been tested during a recession or a sustained economic downturn. The lending model was developed during a relatively healthy economy, but as high inflation rates persist and the current recession in the United States continues or worsens, loan defaults are expected to rise as unemployment rates climb, savings dwindle, and consumers’ finances deteriorate. Investors fear the possibility that Upstart’s algorithms will not outperform traditional credit score models in such a declining economy. The federal reserve is raising the federal funds effective rate to fight the current high levels of inflation. This means that consumers will have to pay higher interest rates for personal and auto loans, which will dampen demand for lending and hurt the industry overall.

Upstart reached an all time high stock price of around $400 in 2021, but is currently trading at around $24, or a rock bottom valuation at the moment. For Upstart to succeed, the company’s default rate needs to be better than the traditional credit score based system. There certainly is a risk that Upstart’s underwriting will perform poorly in a recessionary environment, or that high interest rates will dry up demand for consumer loans.

However, with the company’s massive potential, it may be lucrative to think as a contrarian regarding Upstart as the stock sells off. We should welcome the recession to battle test and validate Upstart’s unproven algorithms, to demonstrate that the model can outperform in both expansionary and recessionary economies. If Upstart can demonstrate this, then this will instill trust in both Upstart’s lending partners and investors, and the stock should soar multiples in the next stock bull market. It may be extremely profitable to make a risk-adjusted bet on Upstart's success in this fearful market.

JUMIA (JMIA)

Jumia is the leading pan-African e-commerce platform operating in 11 of Africa’s fastest developing and largest economies, accounting for over 70% of Africa’s GDP. The company has three business segments: Jumia Marketplace, Jumia Logistics, and JumiaPay. The Jumia Marketplace is self-explanatory as an online store, but the more interesting segments are the latter two.

Jumia Logistics facilitates a large network of warehouses and pick-up locations/lockers for consumers, while improving on the “last-mile” aspect of the delivery.

JumiaPay offers a safe, fast, and easy solution to facilitate online payments on the platform, which is necessary for the many African citizens without the financial services required for digital payments.

As Jumia executes and develops Jumia Logistics and JumiaPay, it should provide the company with strong network effects and competitive advantages against most competitors.

We have seen many successful, early e-commerce companies such as Amazon, Alibaba, and Mercadolibre dominate their respective continents and reach meteoric success. Jumia is such an early e-commerce company in Africa with a first mover advantage in a continent where many countries are rapidly growing economically.

The market was euphoric over Jumia’s opportunity as it pushed the stock price to an all-time high of over $60 in 2021. With recent global recessionary concerns, however, the price has crashed since to $6 per share currently.

The stock market has turned into a risk-off environment during this bear market, which has emphasized the risks for Jumia. What African economies tend to have in common is that they lack infrastructure or logistics to support e-commerce. As e-commerce is still in its early stages in Africa, there is very little infrastructure to facilitate the delivery of goods. In some areas of Africa, there are not even reliable street addresses.

There is a significant unbanked population in this continent without checking accounts or methods of digital payments as Africa has weaker banking institutions compared to the developed, Western world.

While Africa is a diverse continent with some countries having an internet penetration rate closer to the global average, the overall 2020 internet penetration rate of Africa is around 28%. The rates for some of the least developed countries are in the single digits. The relatively few people connected to the internet make Jumia’s total addressable market much smaller than more developed regions.

Finally, there have been concerns about how much cash Jumia is burning for its growth over the past quarterly earnings reports, which hinders its profitability. Also, Jumia’s recent revenue growth does not seem to reflect the massive opportunity the company has in front of it. There is reason to believe that Jumia’s business is not sustainable with its current spending and lackluster growth rates.

There is a reason why companies such as Amazon and Alibaba have not expanded into Africa; however, because Africa contains some of the least developed countries in the world, there is nowhere else that has more long-term growth potential. If you can believe in an African growth story where over years and decades much of the continent will experience faster GDP growth rates than developed countries due to the smaller economies and that higher internet penetration and adoption rates will come with this economic growth, then Jumia may be a screaming buy today at these suppressed prices. This company may still become the “Amazon” of Africa.

SKILLZ (SKLZ)

This is one of the riskiest stocks on this list that may not succeed, but also may be worth for anyone who wants to take a very small gamble

Skillz is a mobile e-sports platform that hosts games created by independent game developers, where players can compete in tournaments and matches for cash prizes or other incentives. By paying a fee to play, players can wager real money on the outcome of these smartphone games, but because it is skill-based, the business is not regulated like traditional gambling companies.

On the surface, the business model seems very investable. The video game industry is the largest entertainment industry and is greater than the movie and music industries combined. By 2020, the video game market grew nearly 20 times larger than it was in 2006. One of the fastest growing segments of the industry has been mobile, smartphone games since mostly everyone owns a smartphone compared to a gaming PC or gaming console. However, there are very few, if any, companies that offer gambling for competitive games, so Skillz seems to have the first mover advantage in this area.

If Skillz operates in such a growing industry with a first mover advantage in its niche, then why is the market so pessimistic on the stock?

At first, the stock market was very excited about the opportunity. Shortly after Skillz went public, the stock reached an all-time high price of $43.72 in early 2021. However, the stock has crashed about 97% from its peak to a current price at the time of this writing to about $1.08 per share.

The reason for such a decline in the stock price is that the monthly active users of the platform (MAU) has been decreasing in most quarters, which is surprising given how much the company has spent on sales and marketing. The company has spent a disproportionate amount on sales and marketing, which has not been consistent in increasing monthly active users and revenue which hinders profitability and suggests that there is little demand for this gambling, competitive gaming service. This is all in the backdrop of the overall stock bear market, which does not favor unprofitable companies with little growth. If things do not turn around eventually, then the company may face insolvency with its current balance sheet.

However, I believe that all it will take to turn things around for the company is one big-hit game that skyrockets in popularity.

A single popular, must-have game that starts trending among gamers could be a catalyst that makes the company more well known, attracts game developers, and allows for future hit titles. Skillz made strategic partnerships in 2021 with the NFL and UFC franchises to publish games from these sport franchises on its platform.

Time will tell if these partnerships will come to fruition, but one cannot ignore the popularity of football in the United States. In fact, yesterday at the time of this writing, Skillz just announced that NFL QB Shootout by developer Play Mechanix is now available for Skillz customers to play.

There is a lot of pessimism priced into the Skillz stock price, but if the bear thesis for this stock turns out to be overblown, then the stock could multiply investors' money who buy the stock today. With a stock price of only $1.08, investors can afford to take a very small contrarian bet that they are willing to lose.