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Contrarian Investing
The Smart Profits Report: Issue #463
Wednesday, October 10, 2007
Contrarian Investing: The Best Investment Strategy You Should Use Today
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
You’re crazy… You don’t know what you’re talking about… Are you serious? You’re going to get slaughtered…
These are just some of the things you might hear if you adopt a contrarian investing style. Having been in the public eye, I know this all too well. But you know what? I don’t blame them.
It’s not easy being contrarian. It’s tough to own a stock or sector that everyone thinks is headed south. It’s even more difficult to sell or short a stock that your friends, family and even the media are trumpeting as the next great thing.
That’s why although many people consider themselves to be contrarian or having a contrarian strategy, the concept of going against the grain actually scares them to death. But let me tell you why it works…
Contrarian Investing: Go Against The Grain Or Don’t Go At All
I’m not a contrarian investor just for the sake of it - and nor should you be. There’s no point trying to be a hero by picking a loser just so you can crow to people if it goes up.
The bottom line is that you need to have the conviction that you’re right and then discipline to stay in the position as long as it still makes sense.
When I worked at the deeply contrarian Avalon Research shop, my director of research taught me to be skeptical of everything management and sell-side analysts say and to leave no stone unturned in pursuit of the truth. These guys were some of the best contrarian minds in the business and we refused to cover a company unless our opinion went against the consensus.
Those lessons have served me well - and have worked. Let me give you a couple of examples…
A Triple-Play Of Contrarian Gains
When I wrote for TheStreet.com, I recommended selling or shorting real estate development company St. Joe (NYSE: JOE) in early 2006.
Given that the housing bubble was in full force at the time, you should have seen the hostility that came my way! But I argued that when the bubble eventually burst, people wouldn’t want to own the company’s luxury homes in the swamps of northern Florida.
You can see for yourself how much St. Joe’s strategy has bombed:
- From a price just under $70 in January 2006, shares have since fallen off the cliff, losing half their value.
- And just a week after a management reshuffle, St. Joe admitted failure, announcing that it will lay off 75% of its workforce (260 jobs cut or transferred; another 500 outsourced).
- It’s also selling off 100,000 acres of land, 1,200 developed home areas.
- And will cut its dividend as part of a wider restructuring plan (or as the company rather brazenly put it… a way to “significant accelerate its value creation process”).
- It will suck up $25 million to $30 million in third-quarter charges, as well as a $7 severance charge.
I also recommended selling P.F. Chang’s (Nasdaq: PFCB), despite crammed restaurants and lines out the door. Problem was, though, that the restaurants were so jammed, there was no room for further growth. The only opportunity lay with its new casual concept Pei Wei, which was struggling to gain traction.
I also love to buy stocks that are out of favor or under-the-radar. In March 2006, I recommended the relatively unknown Dynamic Materials (Nasdaq: BOOM). The stock was trading at about $32 per share. I liked the company’s balance sheet and the fact that it had new orders several quarters in advance. That indicated strong revenue growth ahead. Today, BOOM is trading at $53, a gain of just over 60% from where I recommended it.
And now, I’m doing the same for investors like you…
Get In Early, Then Let The Lemmings Dish You Some Profits
I’ve used this contrarian strategy with my Xcelerated Profits Report recommendations so far, picking two undervalued biotech firms that Wall Street investors have ignored. Bad decision on their part. But their loss is our gain. As of today, we’re up 45% on one since July 23 and up 24% on the other since August 24.
The common denominator with these stocks - and indeed with many contrarian picks - is that Wall Street is missing the boat. When the crowd finally wakes up to the rich moneymaking potential they offer, they all pile in like a bunch of lemmings and move the share price significantly. And if we’re in the position first, we ride the wave.
Speaking of getting in first, I’ll have a new pick in the November issue of the Xcelerated Profits Report, due out at the end of next week. The firm makes medical devices that play to consumers’ vanity, and the balance sheet is rock solid. Again, it’s flying under most investors’ radars, but I think its long-term prospects are enormous. (For more information on how to jump in on this new pick, check out the Action Center below.)
Go Contrarian… But Remember The Core Investment Principles
Nothing compares to getting into a stock before the masses discover it and seeing your returns explode before they finally catch on. And while going against the grain isn’t easy, you can of course still employ other valid investing methods such as value investing, growth investing, or momentum investing (which I consider part of contrarian investing).
And of course, always remember to give yourself a safety set by employing stop-losses, position sizing your investments properly and never investing more than you can afford to lose.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- You don’t have to be an investment expert, nor know everything there is to know about the financial markets in order to adopt a winning contrarian strategy. You can use simple technical analysis to spot when a stock might be taking a turn and could flush out simple investors. Tools like support and resistance levels, a close below a key moving average, or a break of a stock’s trendline can all be reliable and profitable contrarian indicators.
- On a broader level, watch for widespread investor fear or complacency for hints to when a stock might be about to turn. In addition, look at the volume charts - are there any significant breaks from normal levels? Is bullish or bearish sentiment heavily one-sided? What is the mainstream media saying? Not only are they often worng, but they can also guide investors the wrong way, too. If you take the opposite course, you could trump them all.
- Sign up for the Xcelerated Profits Report today and join the team of professional traders that has dished winners of 118%, 79%, 65% and 45%, plus those two current biotech winners mentioned above and a massive 185% gain on the leading company in the field of haptics and touchscreen technology. To continue on for more details on how to win on 80% of your trades… guaranteed, follow this link.
Related Articles:
- Contrarian Investing Strategy: The Most Profitable Way To Invest In 2007
- Sentiment Analysis: Incorporating Contrarian Investing in Your Trading & Financial Endeavors
- Risk Management and Position Sizing: Three Ways To Give Your Trades A Tune-Up
