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What is in a company’s name? asks Benj Gallander, editor of Contra the Heard; our name loudly and proudly exclaims that we are contrary investors and are seeking out unloved investments.
It is also a play on words that can confuse some people who write, “Contra the Herd”. While investing can be a serious affair, we like to have fun. Each quarterly newsletter is splashed with analysis and humor… who wants just another dry investment report anyway?
”Contra” means looking at sectors and companies that are overlooked and beaten up. These prospects often have low valuations, accompanied by an upside of greater than 100 percent. From there, close attention is paid to the balance sheet’s current ratio, intangibles, and debt profile. Respectable insider ownership, top line growth potential, and earnings power are also important. Amongst many other features.
These factors are not enough though. Often corporations are undervalued for a reason, which is why a catalyst is key. This can take many forms including traction on a turnaround, hiring a new CEO, or some sort of macro event.
A history of past success and adapting is critical too, which is why we focus on companies that have been listed for more than a decade. Although sometimes businesses that have been listed for only five years will be purchased for one of the two portfolios.
Our portfolio management strategy is unorthodox too. We don’t window dress, chase the quarter’s best performers, or engage in high portfolio turnover. Often, we hold the 15 to 30 stocks for years, while keeping a close eye on our cash levels.
In our experience, successful investing is the result of placing a reasonable number of bets, while never risking the farm, and waiting patiently for Mr. Market to agree with us… later. Doing this requires a mix of gall and patience.
Often enough, our staying power leads to many of our enterprises being taken over, mostly at a significant premium. Every year since we began almost 25 years ago except for 2010 there has been at least one takeover. 1999 was our heyday with six! Given the nominal number of corporations that we own, this defies probability.
Our subscribers certainly appreciate this. They also are grateful that we only take 1,000 people. Limiting the number of subscribers and therefore capping our income is clearly contrarian. But it means that we can offer a better service to those under the Contra umbrella.
So what sectors are beaten up today? The first answer is commodities. Whether it is in mining or oil & gas, opportunities abound. Though mining stocks have recovered somewhat over the last two years, oil and gas firms remain deeply out of favour despite a run up in the price of WTI and Brent.
One of our top picks in the sector is Trinidad Drilling (TDG:CA). This outfit is North American based, has a reasonable balance sheet relative to the field, and is currently assessing strategic alternatives. The shares are trading around $2.00, and our sell target is $10.25 – $11.75. That assumes it isn’t acquired first.
Another out-of-favor industry is US retail. The sector is not without risk. The Amazon tsunami continues to swell, the shift from bricks and mortar has been volatile, and fashion trends remain fickle.
One of our go to retail names is Guess? (GES). The retailer’s North American operations are suffering and one of its cofounders Paul Marciano has been accused of sexual harassment. Still, its top line is growing thanks to expansion in Europe and Asia.
The balance sheet is squeaky clean and CEO Victor Herrero is executing well on an ambitious turnaround strategy announced shortly after joining the company three years ago. GES was bought at $12.86 and is currently trading around $23 with a sell target of $31.50 – $37.52.
The final unloved arena is overseas. Valuations in the US, and to a lesser extent Canada, are high. This is not the case in East Asia or parts of Europe. Portugal, Greece, Russia, the Czech Republic, Taiwan, China, and South Korea are all inexpensive.
This theme is not for the faint of heart however as debt issues, geopolitical risks, and political corruption abound. Even if a retail investor has the gumption, investing overseas isn’t free as ADRs, foreign focused mutual funds, and ETFs carry annual fees.
A contrary international pick is Global X MSCI Greece ETF (GREK). The ETF tracks over 30 securities and its largest weightings are financials, energy and consumer discretionary.
The situation in Greece has settled down and the country is on track to exit the bailout program in August, but the federal debt remains over 175 percent of GDP and debt relief remains elusive. The ETF was purchased at $9.31 and has a sell target of $17 – $23.
As the name implies, Contra the Heard is a contrary investment newsletter. Chasing returns, forsaking cash and active trading holds no appeal and has been proven to reduce returns. Contra’s mission is to seek out undervalued companies and sectors, and to boldly go where most investors aren’t willing to go… until prices are much higher.
Benj Gallander is editor of Contra the Heard.
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