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5 Contrarian Buys for 2011 - 18102 views
It’s been a volatile, choppy market since the start of the summer, leading some to question whether we’re at the cusp of a more meaningful move in stocks. Last month’s selling was a good example of the pent-up anxiety in investors -- and it’s indicative of what could still be in store for the S&P 500 in 2011.
So should you go contrarian right now?
Contrarian investors are all about formulating alternative views of the market -- betting against the herd as a bubble or overvaluation leaves asset prices out of whack with their fundamentals. Contrarians aren’t constantly betting against the market; this group rightly believes that the crowd is usually right, benefiting from the majority of market moves. It’s at turning points that the crowd is wrong.
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Those turning points can be devastating to investors’ portfolios -- unless you’re a contrarian investor. 2008 is a good example of a turning point that a handful of prominent fund managers benefited from immensely by betting against the consensus -- fund manager John Paulson practically became a household name by taking home billions as the housing bubble burst.
Today, we’ll took a look at five contrarian buys for 2011 -- and the scenarios that could buoy their shares.
It doesn’t get much more contrarian that Beazer Homes (BZH) right now. This homebuilder got shellacked in 2008 when the bottom fell out of the housing market, and the selling hasn’t slowed this year. In 2011, Beazer’s shares have lost more than 65% of their value as sluggish business and investigations into accounting fraud and fraudulent mortgage origination practices shook investors out of the stock.
Despite all of the drama that’s unfolded in Beazer, this company is one of the best pure play names on a U.S. housing market rebound -- a macro theme, incidentally, that John Paulson himself is extremely bullish on. Beazer is one of the largest homebuilders in the country, and following a series of financial shakeouts, the stock is actually on reasonably good financial footing. For the next couple of years, the company is free of nearby debt maturities that could cause a liquidity crisis, and management’s been paring down losses in the last couple of quarters.
Essentially, Beazer is facing a waiting game right now. With significant new home inventories sitting vacant on the company’s balance sheet, the firm needs to be able to float carrying costs long enough to get more attractive pricing from the residential real estate market. For now, it looks like the company has ample cash to keep the motor turning for the next several quarters.
While Beazer is about as speculative as a contrarian trade can get, the fact that this stock trades for less than 60% of its already written-down book value makes the risk-reward tradeoff pretty attractive if housing bulls are right.
Beazer shows up on a recent list of 7 Home-Related Stocks to Watch.
Financials have been getting beaten mercilessly in 2011, and commercial banking name Comerica (CMA) has been one of the worst-affected by the negative sentiment for the sector.
Shares of the firm are down more than 46% in 2011, a year-to-date performance number that’s worse than that of even Bank of America (BAC) or Citigroup (C). To be fair, the selloff in financial stocks has mostly been warranted this year. The sector’s recovery was tenuous at best, and the threat of a double-dip recession and the Fed’s decision to effectively smash treasury yields to the ground (snuffing out the “free” stimulus banks were getting in the spread between the Fed Funds rate and short term treasuries) have seriously impacted Wall Street’s view of the sector.
The majority of Comerica’s business is made up of commercial banking customers -- companies that turn to banks such as Comerica for everything from business loans to checking and treasury management services. Heavy exposure in California and the Midwest (around 70% of the bank’s loan book) ratchets up this stock’s exposure to the broad economy; if consumers in these volatile regions aren’t buying products, Comerica’s clients can’t pay their mortgages.
Still, Comerica has been improving its footing in recent years. Like other big banking names, the company has been working hard to grow its retail and commercial deposit base as a source of cheap capital -- particularly in places such as California, where the firm already has a presence. This commercial bank is a solid contrarian play on a consumer-driven economic recovery.
United Continental Holdings
Airlines are probably one of the few industries that qualify as a contrarian investment most of the time. Generally speaking, air transport is a capital-intense business that’s deeply beholden to swings in energy prices -- a dangerous combination when high oil prices lead to a contraction in the economy.
That said, new aircraft technology and recent consolidations within the industry could potentially shift profitability much higher in the next couple of years. And United Continental Holdings (UAL) is one of the best airlines to benefit right now.
As the largest airline in the country, post-merger United operates approximately 6,000 flights each day from what’s arguably the most attractive hub network in the country. Size also means that this stock is able to save a projected $1 billion in annual merger-related cost savings -- that’s a meaningful margin improvement for a firm that grossed $21 billion last year.
United’s moves to compete against lower-cost competitors vying for the coveted business traveler market are commendable. The company has been reducing its fleet size and focusing on more economical planes. Ample cash in the firm’s coffers offsets the ample debt on its books. This stock is another contrarian play on economic growth.
United comprises 2.3% of Blue Ridge Capital's portfolio and is one of the top holdings of David Teppers' Appaloos Management.
In spite of selling that’s caused shares of J.C. Penny (JCP) to slump almost 20% this year, this stock has at least retained a tenuous grip on its profitability. The 109-year-old department store chain sports a geographic footprint of 1,100 stores in 49 states as well as online and catalog businesses. That makes Penney one of the best ways to get exposure to an upswing in consumer spending.
Penney has been operating under the radar for the last couple of years, commanding a lower profile than retailers chasing more aggressive growth in this market -- and those that are struggling to keep the lights on. That’s actually a good thing for investors. As share prices have slipped alongside the rest of the retail industry, Penney’s starting to look cheap -- the company’s forward P/E is teetering on the edge of single digits, and shares trade for a small margin above book value.
While Penney isn’t the deep value play that it was back in the depths of early 2009, it’s still looking like a good bargain.
In effect, management has decided to hold off expansion until the economy sorts itself out, preferring instead to work on building metrics like comparable store sales growth. That’s an attractive strategy for investors right now -- while capital is cheap right now, it’s cheap for a reason. At least Penney won’t need to worry about an overleveraged balance sheet.
J.C. Penney, one of the highest-yielding retail stocks, is the top holding in Bill Ackman's Pershing Square Management portfolio.
Sears Holdings (SHLD) is an identical way to get exposure to consumer discretionary spending, a contrarian bet on the mediocrity that investors are pricing into the economy right now. Where Penney is a more sober way to bet on consumer spending, Sears is the aggressive alternative. With a short interest ratio of 14.8, this stock has the potential to see a sizable short squeeze on early signs of financial improvement .
Sears has had difficulty maintaining profitability in 2011, with SG&A expenses wiping out what actually amount to reasonably strong gross margins. That fact indicates that Sears is spending itself into the red, a better alternative than an unprofitable core business. At the same time, strong cash flow has been put to work to pay down debt and shore up financial health. If investors can get past the initial recoil of income statement losses and share price declines, there’s reason to like this stock.
Sears’ portfolio of attractive brands (such as Kenmore, Craftsman, and Diehard) has a lot of potential -- and the company’s decision to finally start offering them outside of its own locations should greatly improve their earnings potential. Ultimately, investors do want the profitability and share appreciation that Sears is lacking.
Significant exposure to middle class spending gives this contrarian play the potential to see just that.
Sears is one of the top holdings of Bruce Berkowitz's Fairholme Capital Management, comprising 9% of the total portfolio.
To see these names in action, check out the Contrarian Buys 2011 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.