It pays to be skeptical when you invest. In addition to doubting what the analysts tell you, you often have to discount what the companies tell you, too. On Wall Street, going against the grain can reap huge rewards. Like baseball's greatest place hitter, "Wee Willie" Keeler, great contrarian investors such as Benjamin Graham, Warren Buffett, and John Neff "hit 'em where they ain't."
Today's new breed of contrarian investor can be found at Motley Fool CAPS, where these savvy Fools are willing to see both the upside and the downside of a stock. While their often negative opinions peg them as "skeptics," their top CAPS ratings mean they're right far more often than not. And when they find a stock they actually believe will outperform, perhaps we should take notice.
Here are some recent picks from our list of Foolish CAPS skeptics:
Just as a list of their worst stocks would not be a list of stocks to short, this list of the skeptics' favorites isn't one for automatic buys. But they do offer an excellent starting place for your own research.
Publishing phone directories probably doesn't excite too many people as a hot investment concept, what with solar stocks, gold mining companies, and anything having to do with any of the so-called BRIC countries generating so much more interest. Yet in such mundane businesses, it's possible to make a profit and for investors to ride along. After all, Peter Lynch loved these types of companies. Only it seems hard to fathom why a company like Idearc should continue to prosper.
It hasn't been doing so well lately, though it generates large amounts of cash flow. In its most recent quarter, Idearc, which was spun off from Verizon (NYSE: VZ ) in late 2006, generated $202 million in operating cash flows, even though revenue had fallen by about 13% since 2003. Competitors like RH Donnelley (NYSE: RHD ) haven't been real page turners either; that company posted a $1.6 billion loss in its most recent quarter.
The problem seems to be that Idearc is a classic cigar-butt company, one you would pick up to try to get a few last puffs. The printed phone directory business is on the decline because Internet alternatives proliferate. Although Idearc runs SuperPages.com, it falls far short of Google or Yahoo! when beginning a phone record search, and is even behind AT&T's YellowPages site in unique visitors, according to analysis by Compete.com.
With Idearc's main publishing business on the skids and being outmuscled by its online rivals, this seems to be a tough industry for investors. Yet the prodigious amount of cash the company is able to rake in keeps investors interested. CAPS investor Rockscaler, for instance, sees the publisher not in decline, but rather in transition.
Their core print yellow page business will provide the cash for their transition into internet superpages and search. They were dumped by Verizon owners who didn't want the stock but are a huge value now with a P/E of 2. Idearc's internet earnings rose last quarter and that should continue.
Similarly, HotStove3 feels the market has greatly undervalued the company because even if its print market is in decline, it won't completely disappear.
The current stock price is a market overreaction. The core business is worth way more than 3.77 per share despite what the future internet capacity is. The average person will always check the local yellow pages over firing up the laptop for local business recommendations.
Many investors, though, just can't seem to get the same grasp for future growth that these players do. jwagner2000 thinks Verizon understood this when it decided to spin them off.
[Idearc] does not have the necessary cash flow to pull itself out of its current doldrums. In addition this sector of the market appears to be completely out of favor. Even a significant presence on the internet will not help. Consumers do not search the yellow pages (in any form) to find products and sellers. They use Google! Verizon may have seen this future for their yellow pages business when [they] spun [Idearc] off.
Seeing past the obvious
Skeptics know that just beyond the storm clouds lies a shimmering morning. Conversely, the sun can't shine forever, whatever the crowds may think. What's your forecast? Drop by CAPS and tell us which stocks are your favorite contrarian picks.