Academics call it contrarian investing. But on trading floors it has acquired a more colloquial name — the “dash for trash”.

That tactic — closing your eyes, holding your nose and picking up the stock market’s most malodorous shares, or at least those that the majority of investors have left out with the bins — has worked spectacularly well this year.

Nowhere more so than in the FTSE all-share’s lower reaches. Pendragon, the car dealer that was in danger of disappearing under its debt burden, has risen to nearly 20 times its January price; JJB Sports, the retailer, has surged more than eightfold, and Avis Europe, the car rental group, nearly sixfold.

All three are stocks that, on conventional measures of valuation, such as balance-sheet strength and forecast profits, would have ranked among the market’s lowest-quality constituents at the end of last year. However, in this case the potential rewards from coolly appraising a company’s near-term prospects have been firmly eclipsed by the willingness to take a bet on the shares that the stock market had priced for financial distress.

But that gambit also held good higher up the corporate scale. The worse a stock was treated in the post-Lehman Brothers sell-off of 2008, the harder it has rallied in 2009. This year’s four best performers in the FTSE 100 are drawn from among last year’s most conspicuous casualties — Kazakhmys, Fresnillo, Vedanta Resources and Xstrata, all foreign-domiciled miners.

The opposite has also applied. Large-cap companies whose defensive traits served them well during 2008 have been held back in a year when investors have instead sought exposure to a cyclical economic recovery. AstraZeneca, the drugs maker, Royal and Sun Alliance (R&SA), the insurer, and Capita Group, the outsourcing specialist — relatively safe havens throughout a savage bear market — have all lost money for shareholders since January.

Citigroup has taken a rather rigorous approach in examining this yo-yo phenomenon. What if, at the start of every year, shareholders ignored the siren call of profits, dividends and cash and blindly bought the previous year’s ten biggest losers, and sold the ten biggest winners? How would they fare?

On that measure, the US bank finds that 2009 stands out as the best year ever for the contrarian investor. Such a high-risk technique has only produced a profit in four out of the past 14 years (see chart). Instead, it has been far better to favour so-called “momentum” investing — the time-honoured technique of sticking with winners and shunning losers that has made “the trend is your friend” such a familiar cry.

But as Citigroup points out, when contrarians win, they tend to win big. So far this year, a strategy of swimming against the previous year’s tide, if applied to Europe’s biggest companies, would beat the stock market by nearly 200 per cent.

In the UK, buying last year’s ten biggest duds would have generated a precise 100 per cent outperformance against the FTSE all-share index. Indeed, only two of those stocks would have booked a loss — both of them banks: Royal Bank of Scotland, down 33 per cent, and Lloyds Banking Group, off 5 per cent.

The opposite tactic also worked, admittedly to a lesser extent. Selling last year’s ten biggest blue-chip winners would have produced an aggregate 10 per cent gain against the FTSE all-share. Similarly, there were only two stocks that failed to conform: Experian, the credit reference agency (up 32 per cent), and Autonomy, the software developer, (ahead 48 per cent) beat the stock market last year and have continued to do so in 2009.

Overall, Citigroup finds that, in 2009, a contrarian stance in UK stocks would have recouped all of the previous five years of underperformance, and then doubled it the other way.

So what does this highly unconventional strategy dictate for those who seek to repeat the trick in 2010? Aside from the four foreign-domiciled miners already cited, investors would have to sell ENRC and Rio Tinto, as well as Petrofac, the oil services group, Burberry, Rentokil Initial and Old Mutual, the South African life insurer. In short, shareholders are being asked to make a bet against the smooth advance of emerging markets and in favour of the advent of a double-dip recession. By the same measure, a basket of stocks bought on the basis of 2009 underperformance would include a clutch of relatively defensive stocks: United Utilities and Severn Trent, the water companies, as well as R&SA.

But there is a caveat that suggests that contrarian investing should be better considered an amusing end-of-year diversion for followers of fantasy portfolios than bets to be made with real cash. Contrarian techniques only tend to work during major turning points in stock markets, finds Citigroup — such as that witnessed in 2009 when investor sentiment swung wildly from fears of depression to hopes of recovery.

On that basis, this year’s collection of “trash” — companies whose share prices reflect the risk of failure — is best left where it fell.

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