You know how no matter what's happening in the economy, it seems like everyone's rushing to figure out what the best investment, trade, or "play" is to cash in?
It's an intriguing -- and popular -- idea: Identify an important trend that you think will emerge, plan a strategy to cash in on it, and choose a stock you think will gain.
In the past, I've explained which groups of stocks I believe will do relatively well during an extended downturn: utilities like Waste Management (NYSE: WM ) , mortgage REITs like Annaly Capital (NYSE: NLY ) , luxury providers like Pebblebrook Hotel, and multinationals like Coca-Cola.
But there's a proven way to make money in tough times without having to worry about developing correct predictions about the future of the global economy. And it's one that I'm using in my own portfolio right now. Today, I'd like to share with you four contrarian stock ideas to profit from in today's market.
"Be greedy when others are fearful"
None other than Warren Buffett, the world's third-richest person, made his $50 billion fortune following the contrarian mantra "be fearful when others are greedy, and be greedy when others are fearful."
The principle is simple -- when everyone feels bullish, stocks become expensive, and future returns suffer. It's actually during complacent times like the late 1990s, when valuations are sky-high, that investors should be fearful.
On the other hand, it's when the mood is gloomy that more and more opportunities become available. Since the market depths on March 2009, when investors were convinced the end of the world was just around the corner, the market has returned a whopping 80%.
And now, thanks to recent worries of an economic slowdown and the European banking crisis, fear is again in the air.
Now, of course, bargains aren't as pervasive as they were in 2009. And I don't mean to necessarily suggest that we're sitting on another market bottom -- those are impossible to predict. Rather, bargains do exist if you know where to look. Amazingly, 369 of the 3000 non-micro-cap stocks out there are trading at cheaper valuations than they did during the depths of the financial crisis.
Here are four contrarian companies that operate in industries hit by the current downturn that I'd like to highlight:
|
Company
|
P/E (Market Bottom)
|
P/E (Today)
|
| Aeropostale (NYSE: ARO ) |
10.5 |
5.6 |
| Dolby Labs (NYSE: DLB ) |
14.6 |
12.2 |
| Oshkosh (NYSE: OSK ) |
17.6 |
5.2 |
| Intel (Nasdaq: INTC ) |
13.5 |
10.1 |
Data from Capital IQ, a division of Standard & Poor's.
Clothing retailer Aeropostale has been absolutely hammered this year, as investors freaked out over the weak environment for middle-income retail and some fashion mistakes the company made in its women's merchandise that resulted in inventory writedowns. But Aeropostale is an efficient operation that's led by an experienced team. It boasts $626 in sales per share foot of store -- about 50% to 100% higher than competitors like Abercrombie and Gap. Despite its recent troubles, at 5.6 times earnings, the stock is just way too cheap.
Dolby makes audio and video equipment and licenses its ubiquitous technology to the film, PC, and video-game industries. Yes, just in case you were wondering, it's a high-moat, high-margin business. Nearly a third of the company's revenue is profit. Dolby's stock has fallen on speculation that the upcoming version of Windows will leave them behind and has gotten quite cheap.
Oshkosh manufactures trucks for the military, gear for fire and emergency vehicles, and other specialty equipment for towing, snow removal, cranes, and so forth. Fully 73% of the company's sales come from the military. But defense spending is on the chopping block as Congress looks for ways to save money from the budget. And if the supercommittee doesn't come to an agreement later in the year, that would trigger large cuts to military spending under the recent debt-limit deal. I'm a bit more nervous about this stock than many of the others, because of the potential for budget cuts, but it could very well be significantly undervalued, too.
Chip giant Intel has been hit by concerns about consumer spending and over its difficulty entering the smartphone market -- it had planned to work with Nokia (NYSE: NOK ) , but in the end the phone maker decided to go with a Windows operating system that doesn't use Intel's chips. But it's important to realize just how large and powerful Intel is. Last year, it spent more than twice as much on R&D and capital investments as its chief competitor, AMD, produced in sales. That scale is a massive competitive advantage that allows Intel to out-invest its competitors while still maintaining high margins.
The Foolish bottom line
If Buffett's approach makes sense to you, keep searching for cheap companies that continue to execute in spite of the economic headwinds. Because with pessimism again in the air, now is an excellent time for bargain-hunting. If you're looking for more stock ideas, check out "5 Stocks The Motley Fool Owns -- and You Should Too," which gives the reasons behind five stocks. You can download this special report for free.
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