A contrarian follows one simple philosophy: Go against the crowd.
Specifically within the realm of investing, a contrarian investor acts on the belief that heavy pessimism might signal a stock is oversold or undervalued, creating an investing opportunity before the market value corrects itself.
However, identifying instances where investor sentiment becomes so extreme that they feel a turnaround is imminent is no easy task.
Turn to the pros: Croft strategy
Croft Leominster describes itself as a value-oriented hedge fund with a "contrarian bent." Given the firm's positive performance record, and nearly $1 billion in assets, we can assume they know a thing or two about avoiding falling knives.
Spoken like a true contrarian, Vice President and Co-Portfolio Manager Russell Croft tells Kapitall his funds look for value stocks in three ways:
- Strong contrarian signals: "When Wall Street has really beaten up something, that peaks our interest. It can take a while to work out but they can be your best investment over the long term."
- Growth at a discounted price: Earnings around $0.60 per dollar.
- Catalysts: Looking for companies with promising restructuring, new management, "or where we think the asset value of a company might get realized in the medium term."
Croft says using these requirements usually yields about 200 names, which his firm narrows down to 80. Those stocks are bought, held and consistently monitored for three to five years.
Contrarian opportunities come up in nearly every industry, but Croft feels especially good about natural gas. Many dislike natural gas because of how it's been punishing commodity prices, but it is still an important part of our country's future.
"It's a job creator, politically friendly, and on the environmental side I don't know when we'll ever see another coal plant built in the U.S. We have so much of it, providing the opportunity for the country to build infrastructure around it. In the long term, this is an opportune time [to invest]."
Although people are worried about the low price of natural gas, Croft says since gas trades below the industry's marginal cost of production, we'll see companies shutting down and going back into oil, which will drive up the price of natural gas.
"We had a warm winter and will likely have a very warm summer, which will drive up utilities. Utilities are also switching over to natural gas -- we're definitely walking into some supply/demand issues, which is good for prices."
His favorite natural gas stocks include Southwestern Energy and Ultra Petroleum, as well as Canadian stock Progress Energy Resources.
When it comes to agriculture, Croft sees demand for fresh water running higher at increasing rates.
"As water becomes a more valuable commodity, providers will increase investments aimed at protecting their supply and driving efficiencies to maintain their margins. Major beneficiaries should be providers of more advanced water infrastructure products including pumps, pipes, and valves, filtration systems, testing equipment and instrumentation providers."
His firm's favorite water stocks include Valmont Industries
He adds that agricultural plays Monsanto and Deere still look promising.
Business section: Investing ideas
Looking for more contrarian ideas?
We screened the S&P 500 index for companies with high short floats and that have seen a significant rise in shares shorted. In other words, short-sellers have positioned themselves for more downside over the coming weeks.
Short-sellers think these companies are in trouble. Is this pessimism justified? (Click here to access free, interactive tools to analyze these ideas.)
1. Expedia: Operates as an online travel company in the United States and internationally. Short float at 20.26%. Shares shorted have increased from 17.88 million to 19.02 million over the last month, an increase which represents about 1.28% of the company's float of 89.34 million shares.
2. Frontier Communications
4. R. R. Donnelley & Sons
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Short data sourced from Yahoo! Finance and Finviz. The Motley Fool owns shares of Ultra Petroleum and GameStop. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum. Motley Fool newsletter services have also recommended creating a modified stock repair against synthetic long position in Monsanto and writing covered calls on GameStop. The Motley Fool has a disclosure policy.
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