Some stock pickers start with a screen. I start with a concept: Look for the hated!
I search for investment themes that are decidely contrarian. That means that few like the concept, the sector or the stock. The themes must meet several important critera:
- Negative sentiment and/or polling
- Analyst skepticism
- Modest valuations
and most importantly -- hatred.
I am going to list some themes and you probably will not like them. That is the point.
My mission here is to provide some specific ideas as well as suggestions about how the individual investor can search for and find profitable investments.
One problem is determining what most people believe. That is the only way to find the contrarian (and possibly undervalued) side of the trade. I want to encourage a free-wheeling discussion that will be helpful to all, but let me suggest two rules:
- Nothing political. I understand that you may think that Europe is in a socialist decline or be offended by Romney, but that is not the point. This is about investments, not political philosophy. We can predict political outcomes, but the purpose is to find investments.
- The time frame must be reasonable. I personally screen using three to six months.
Here are a number of themes that I nominate for consideration.
This is an easy choice. Even the most optimistic economic forecasters only look for growth of 2.5% or so. There are many recession callers including many/most pundits (especially non-economists) and the ECRI. The recession forecasters have influenced earnings forecasts, now showing little growth in 2012, and stock prices.
Time frame: uncertain. The recessionistas started making their forecasts last Spring at the time of the Japanese earthquake. Q3 economic growth did not support the theory. Perhaps another strong quarter will move attitudes.
Stocks: Cyclicals and Tech. Caterpillar (CAT) and Oracle (ORCL) are contenders, but the nominations are open.
This is open to some debate. The credit market has not shown any recognition of improved prospects. Some think that stocks have recently been "euphoric" but it could also be a reaction to the good earnings season.
Time frame: week to week, but some specific tests within two months. I think the verdict (for US investors) will be in within eight months, although the social issues may linger.