FTSE 100 Contrarian: Investing in the Losers

LONDON -- Back in 1939, one of the pioneers of international investing, Sir John Templeton, borrowed money to buy 100 shares in each of the 104 companies on the New York Stock Exchange that were trading at under $1 -- 34 of which were in bankruptcy at the time. Only four ended up worthless and he made large profits on the rest.

While I don't advocate borrowing to invest or picking shares based solely on an arbitrary pound value, I do appreciate Sir John's courage to invest in unloved shares as Europe entered into war.

Times aren't nearly as dire today, but I've decided to channel my inner Templeton and take a look at the opportunities presented by the worst performing shares in the FTSE 100 last year (ignoring those shares that were relegated to the FTSE 250 for simplicity's sake) and creating a hypothetical portfolio to track their performance during 2013.

We'll start by looking at the five worst performing shares for the year.

Company

Market Cap (£m)

2012 Performance

ENRC  (LSE: ENRC  )

4,377

(55%)

EVRAZ  (LSE: EVR  )

4,540

(31%)

BG Group  (LSE: BG  )

38,086

(26%)

Anglo American  (LSE: AAL  )

26,421

(20%)

Wm. Morrison  (LSE: MRW  )

5,968

(19%)

Returns do not include dividends

ENRC
Formally known as Eurasian Natural Resource Corp, ENRC mainly digs up the components of steel (iron ore and ferroalloys) in Kazakhstan. Last year this wasn't a great business, as falling or faltering economic activity resulted in demand for steel only growing 2%, while regional demand in Europe fell an estimated 9%. This resulted in falling prices for the company's major products, which translated to falling sales and profitability and a nearly 60% reduction in the dividend.

Not a great recipe for winning the market's love -- especially when your company is trying to support £2.4 billion in net debt and fund nearly £5 billion in capital expenditures in the coming five years.

ENRC could sell off some assets to help reduce debt, but getting a good price in a time when commodity prices are under pressure is a tricky proposition. Unfortunately, the outlook for iron ore and steel prices doesn't look all that great, so the company's struggles could persist through 2013. However, after losing over half its value last year, these troubles could already be priced into the shares and it could be that any positive surprises could send them up nicely.

EVRAZ
Speaking of steel's struggles last year we come across EVRAZ, which is a Russia-based, vertically integrated maker of steel products -- mainly rails. EVRAZ is majority owned by one Mr Roman Abramovich and three other directors, which leaves only 23% of the company available to investors like you and me. As already discussed, 2012 was tough for those in the steel industry and EVRAZ reported a loss through the first half of the year.

While I may be intrigued by the rebound opportunities if we were to see economic growth spring back to life, and I like to invest alongside management, I am a little uncomfortable when directors own so much of a company as there are few checks on their actions and minority shareholders have to trust that management will look out for them.

Anglo American
A little further down our list we have iron ore and platinum miner Anglo American -- anyone seeing a trend here? Not only did Anglo American have to deal with falling prices for its rocks, but it also had to deal with a rash of worker unrest in South Africa its main base of operation.

I'm all for workers getting paid appropriately for their work, but the reality is that in the world of commodities it is the low-priced producer that survives the longest and rising wages threaten Anglo American's profitability. The stickiness of this situation cost Anglo's CEO her job and will pose a significant challenge for her successor.

BG Group
Sticking with commodities but moving to natural gas BG Group's shares sold off dramatically -- dropping 17% in two days -- following management's announcement that production would be flat in 2013.

The potential for strong production growth out of BG's assets in Australia and Brazil is still there, but there is a lot of work to be done before the gas starts flowing. This increases the risk to shareholders -- especially given the cost overruns being reported across liquid natural gas (LNG) projects in Australia -- which is why the shares were dumped.

A clear development plan and some signs of progress will likely be needed before the market regains its confidence in these shares, and that could take some time.

Wm. Morrison
The smallest of the big four grocers Wm. Morrison is in a tough position because U.K. consumers are cutting back spending as disposable income gets pinched and smaller competitors like Aldi and Waitrose are doing everything they can to take market share -- and recently they've been succeeding.

Morrisons doesn't have the scale or margins of giant Tesco, so it is in trouble if an all-out price war is launched. The company also lacks an online presence and a smaller convenience store format -- two of the main drivers of growth right now for grocery chains.

On the positive side, with shares selling at less than half of sales, it appears there is plenty of pessimism priced into these shares and the company seems to have lots of low-hanging fruit that it could pick to improve its situation.

A sorry lot
This group of companies aren't exactly inspiring, but what would you expect from a bunch of losers? Some of their woes will only improve with rejuvenated economic conditions, while some could be addressed by a talented management team. In any case success, as always, is not guaranteed.

We'll have to see what 2013 brings for these laggards -- if things break the right way some of them could be next year's winners.

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