If you're like most people, there are certain companies that you wouldn't be caught dead owning. These companies aren't necessarily the controversial ones. While there are plenty of people who hate how Altria
No, I'm talking about Blockbuster
He wouldn't do it. And do you know why? Because these companies aren't cool. Which is precisely why I'm interested in them; because when everyone thinks the same thing, then nobody is thinking very much. And that's exactly the point when I become interested.
See through prejudice
There are a few reasons why companies are totally hated, but three such reasons reign supreme: a poor competitive position, poor apparent operating measures, or a poor industry.
"Wait, what was it that you said about being interested in companies like this?" Well, it's pretty simple. In a lot of situations, out-of-favor industries and bad operating performance actually mask pretty good companies. And if no one is interested in buying these companies, then guess what? That's right -- they tend to be cheap.
Cheap is cheap
I'll give you an example. In 2003, my colleague Tom Jacobs recommended funeral home operator Alderwoods
In 2003, Alderwoods was un-ownable, according to the general market's opinion. The market was wrong. Really wrong. And how about Denny's
The Foolish bottom line
Of course, being a contrarian doesn't mean that you simply bet against the market. When Delta careened toward bankruptcy, it would have been a poor time to step in the way with your hard-earned money. But looking at companies that others hate is a tried and true way to improve your chances for outperforming the market. It requires keeping your skeptic's hat on. When the world hates Deluxe
Bill Mann is co-advisor of the Motley Fool Hidden Gems newsletter service. To see his latest ignored, unloved stock idea, subscribe to Hidden Gems today. Since inception, the newsletter's picks are outperforming the market at large by an average of 25 percentage points. The Fool's money-back guarantee stands behind the offer.
Bill owns shares in Denny's. The Fool has a strict disclosure policy.