Today's 5 Biggest Contrarian Plays

Contrarian investors often repeat Warren Buffett's famous saying:

"I will tell you how to become rich: Be fearful when others are greedy, and greedy when others are fearful."

Easy to say. Hard to do. If it weren't, everyone would be rich. But with Buffett's advice in mind, I've rounded up what I consider the five biggest contrarian investing ideas right now.

1. Cisco (Nasdaq: CSCO  )
Cisco's been steadily falling since February. It's now down 25% over the past six months. This networking company sells products that allow servers, computers, and other devices to connect to each other over the Internet.

Cisco gets no respect for being dominant in its markets. Analysts estimate the firm has a 58% market share in networking equipment. Yet for such a powerful company, the stock is inexpensive any way you look at it. 

The company trades for a P/E of 12 and a P/FCF of 9.3. It has a rock-solid balance sheet, with net cash of just more than $25 billion representing 30% of its market cap. Some analysts dismiss the company's cash hoard, since most of it resides abroad. But even if it were all brought back to the U.S., and taxed at 35%, the company would still have a net cash position of $10 billion.

On top of all this, Cisco pays a 1.5% dividend and has plenty of room to expand it. Furthermore, if Uncle Sam declared a tax holiday for repatriating cash, Cisco could bring its cash over and pay a large special dividend.

Click here to add Cisco to your watchlist.

2. Annaly Capital Management (NYSE: NLY  )
While Annaly's share price has remained basically unchanged over the past six months, it's still a contrarian pick, since the shares yield a whopping 14%. If it weren't contrarian, the yield for Annaly and its related company Chimera (NYSE: CIM  ) , at 15.1%, would be much lower.

Annaly is a REIT that borrows money at the cheap interest rates available today, and with it, buys higher-interest, government-guaranteed, residential mortgage-backed securities. (That's a mouthful!) So why is the yield so high? Investors fear that the spread between the rates at which the company can borrow and lend will narrow far enough to prevent Annaly from paying the huge dividends its investors are clamoring for. Annaly is a good bet if you believe the government will continue to keep short-term interest rates low.

Click here to add Annaly Capital Management to your watchlist.

3. Research In Motion (Nasdaq: RIMM  )
Research In Motion had been steadily falling until June 17, when the stock suddenly entered freefall. RIM plunged a whopping 23% after missing earnings expectations, capping off a 55% decline over the last six months. Market share lost to the iPhone and Android-based phones, rising iPad sales, a longer-than-expected overhaul of its software platform, and a restructuring have all hurt RIM's performance.

Before earnings, the shares looked cheap, with a P/E of 5.5 and a free cash flow yield of 15.6%. After earnings, the shares still look cheap, with a new P/E of 4.5 and a free cash flow yield of 17%. On the balance sheet side, you don't need to worry, since the company has no debt. Research In Motion is a good bet if you believe its future is not as bleak as analysts think.

Click here to add Research In Motion to your watchlist.

4. CSC (NYSE: CSC  )
CSC is down 30% over the past six months after reporting disappointing earnings and weak guidance. One of the world's largest IT services firms, CSC runs essential IT processes and functions for governments and businesses. The U.S. government is CSCs biggest customer, making up 37% of its revenue in fiscal 2011.

It may seem ludicrous to purchase a company so dependent on the government, when every day Democrats and Republicans talk of throwing America under the bus. Still, the company is a cash cow, generating $900 million in free cash flow for the trailing 12 months ended April 1. That puts the firm's valuation at just more than times FCF. You rarely find solid companies trading that low.

Click here to add CSC to your watchlist.

5. AIG (NYSE: AIG  )
AIG is down 48% over the past six months, and now trades $2 below its May re-IPO price of $29. If you are an American, you currently own 77% of AIG through the Treasury Department. While you might be appalled at the thought of increasing your stake, there's a lot to like about AIG.

The company remains strong in property & casualty insurance, with a 7.4% market share, and life insurance, with a 1.4% market share. On top of that, the stock is cheap, trading for a P/B of 0.6 and a P/E of 8.4. Compare that to peers Prudential Financial (0.95,11) or MetLife (0.9,14.8), and you can see why AIG is star fund manager Bruce Berkowitz's largest position. Investors worry that continued government selling will weigh down the stock, but to this Fool, AIG looks like a great contrarian pick.

Click here to add AIG to your watchlist.

Foolish bottom line
These five plays are getting no respect from the market. Intelligent investors should get greedy while the market is fearful. If you're looking for more ideas, the Fool recently wrote a report highlighting five stocks that Motley Fool has bought for its own account, including one stock I highlighted in this article. I invite you to download it for free, just click here.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He owns shares of Annaly Capital Management. The Motley Fool owns shares of Annaly Capital Management and Chimera Investment. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 18, 2011, at 4:53 PM, Abigsoxfan wrote:

    "The company remains strong in property & casualty insurance, with a 7.4% market share"

    Just because it maintains a 7.4% market share does not imply the company remains strong in P&C insurance. Having a large market share in a business which currently sucks is not a good place to be. And if you maintain that market share because you consistantly under-price your product it is even worse. The proof of AIG under-pricing their product is shown by their having to increase old reserves to the tune of several billions of dollars in each of the past two years which much more to come. The stock is off 48% over the past 6 months for good reason. And down again today I see. Ask anybody famliar with the P&C business about AIG's role in it and you will get the same answer. They are the leaders in cutting prices.

  • Report this Comment On July 18, 2011, at 5:18 PM, DRS73 wrote:

    Also, consider how many people kick themselves later when they see assets growing but never made the necessary move...while we sleep and eat and live, these opportunities pass us by if we have not acted upon them when the time was right now.

  • Report this Comment On July 18, 2011, at 5:49 PM, BuffettJunior1 wrote:

    None of those companies you mentioned are very good. CSCO is the best out of the list of 5. However, CISCO is a tech stock which means its unpredictable.

  • Report this Comment On July 18, 2011, at 7:58 PM, TaoOfPatrick wrote:

    Well i know now that iam no Contrarian.Mine are not made of Brass!

  • Report this Comment On July 18, 2011, at 8:58 PM, aikhanoum wrote:

    There's a report that Cisco is cutting 6,000+ jobs. Is it still a good contrarian play ;-) ?

  • Report this Comment On July 18, 2011, at 10:05 PM, kdoug wrote:

    I've been a Blackberry fan for over a decade and stayed with it even as my associates moved one by one to the iPhone. When RIM came out with the Torch, I thought it was finally going to come out with a product that had the best of what I like -- a touch screen but a raised keyboard. So, I rushed out a bought one not long after it was released depite a few bad reviews that i read on-line. Boy was and am I disappointed. It is slow to reboot after going into lock mode, it fails to switch from program to program smoothly and quckly, I have repeated problems with getting a connection with collers, and after having it for almost a year I'm not sure how often it has caused me to say words that are not suitable to post. The Torch goes to the recycle bin the day I can get my hands on the iPhone 5. I have aways heard it said that an investor should consider buying companies whose products you use and like. The reverse is also bound to be true. RIM as an investment? No way. Maybe it'll pull out of its problems with a new OS but they sure haven't done it yet from the perspective of this user -- soon to be an ex-user.

  • Report this Comment On July 19, 2011, at 1:27 AM, jfr4958 wrote:

    I don't see the how NLY, AGNC and CIM can continue to pay out their way above average dividends with an almost definite closing of the gap between the high government interest rates.

    I see NLY taking a dive, like CIM is currently doing, and their dividend probably falling to around $2.00/share per annum if they are lucky. IMHO.

  • Report this Comment On July 19, 2011, at 11:51 AM, GettingtobeaGuru wrote:

    This sort of article is what I want to see. Call me crazy but I prefer stocks that are undervalued

  • Report this Comment On July 19, 2011, at 11:57 AM, JustMee01 wrote:

    For the contrarian, I'd recommend a look at the Duck, AFLAC.

  • Report this Comment On July 19, 2011, at 2:11 PM, TMFDanDzombak wrote:

    @ABigSoxFan Fair point but does it really deserve a 40% discount to book value?

  • Report this Comment On July 21, 2011, at 10:26 AM, Classof1964 wrote:

    Both Cisco and Intel peaked in 2000 and have really fallen for a decade into modest trading ranges. One needs to consider the huge number of shares of stock of each, the number of stock options and splits over the years. With over five billion shares of stock in each company, they would have to have a huge increase in profits to bump the stock price up. I do not doubt that each is a leader in its field, but one has to consider whether the relationship between anticipated future earnings and the large number of shares already claiming a share of those earnings justifies an investment.

  • Report this Comment On July 26, 2011, at 3:03 PM, mbernhardt wrote:

    I have owned NLY for years, and the yield has ALWAYS been around 14%. that high yield has nothing to do with current investor fears and everything to do with their ability to make a lot of money from the spread between the cost of their money and the interest on the mortgage-backed securities they own. Their dividend has varied a bit over the years, and with it the stock price. I'm not in it for capital gains. The way I look at it, if the price goes down to 16 (and it has), I'm still making 14% on my investment regardless of what I paid. After about 7 years the stock has paid for itself.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1520657, ~/Articles/ArticleHandler.aspx, 11/24/2014 9:17:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement