Make a Contrarian Bet With These ETFs

So many stocks are so beat-up now, there should be a lot of bargains out there.

Stocks that have fallen out of favor despite positive attributes such as low valuations, healthy dividend yields, or consistent earnings growth are everywhere. Here are two ETFs that might appeal to contrarians with an appetite for buying opportunities amid the chaos.

Straight to the Bank

Among the more notorious casualties in 2007 were the financials, which fell victim to massive writedowns on subprime mortgages. This meltdown has one investment advisor thinking back to the dot-com collapse, which offered substantial opportunities amid all the pain.

Rick Ferri, CEO of Portfolio Solutions LLC and author of The ETF Book: All You Need To Know About Exchange-Traded Funds, sees the iShares Dow Jones U.S. Regional Banks(IAT Quote - Cramer on IAT - Stock Picks) as a sound play for contrarian investors who are in it for the long run. The fund, which has top holdings such as US Bancorp(USB Quote - Cramer on USB - Stock Picks), SunTrust Banks(STI Quote - Cramer on STI - Stock Picks), PNC Financial Services Group(PNC Quote - Cramer on PNC - Stock Picks), and BB&T(BBT Quote - Cramer on BBT - Stock Picks), is down 29.9% from a year ago, but is yielding 3.2%.

"This sector reminds me a bit of the technology sector back in 2003," Ferri says. "If you are willing to accept some negative earnings trends in the short term and some volatility along the way, you will likely be rewarded over the next five years."

Ferri believes that patience is crucial at this stage in the game. "It is a bit of a waiting game at this point," he says. "The sector will eventually come back. It is just a question of when."

Too Soon To Jump Back In?

It's debatable whether it's premature to jump back into the homebuilders -- even for contrarians. In a Feb. 4 research note, Michael Rehaut, an analyst for J.P. Morgan Chase, wrote, "We believe current valuations are unsustainable, and thus maintain our negative stance."

Although the sector was collectively taken to the woodshed in 2007, it has recently begun to show signs of life. Over the past five weeks, SPDR S&P Homebuilders(XHB Quote - Cramer on XHB - Stock Picks) has been among the top-performing ETFs. It has risen 22.2%, compared with a 2.3% decline for the S&P 500. Its top holdings include Hovanian Enterprises(HOV Quote - Cramer on HOV - Stock Picks), D.R. Horton(DHI Quote - Cramer on DHI - Stock Picks), KB Home(KBH Quote - Cramer on KBH - Stock Picks), Meritage Homes(MTH Quote - Cramer on MTH - Stock Picks) and Toll Brothers(TOL Quote - Cramer on TOL - Stock Picks).

Rashid Dahod, an analyst for Argus Research, acknowledges the opportunities that the homebuilders present, but concedes that they are not out of the woods yet.

"Long term, the homebuilders are at great valuations, with many priced below their price/book values," he said. "In the short term, though, the industry as a whole is plagued by a surplus of inventory."

David Goldberg, an analyst for UBS, sees the potential arising for strategic lot purchases by some of the builders if downturn in the industry becomes even more drawn out.

In a research report, he notes, "The builders with lower inventory levels will reload with less costly land, which should help generate improved profitability more quickly."

Goldberg has tagged both Meritage Homes and Toll Brothers with buy ratings.