Commit these quotes to memory:
"Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds."
-- Seth Klarman, Margin of Safety
"Be fearful when others are greedy, and be greedy when others are fearful."
-- Warren Buffett, Buy American. I am.
You see, value investing is about paying attention to what you pay for an investment. And because we know fear often drives investors to sell their stocks that have already been pummeled, smart dudes like Klarman and Buffett scour the trash bin for bargains, ignore the consensus sentiment and do their own thinking. With that framework in mind, here are three ideas in beaten down sectors that may warrant further investigation.
Defend your portfolio
Investing in the defense industry has traditionally been a safe move for investors. U.S. defense spending has grown at a compound rate of 9.2% over the last decade. But with massive federal deficits and an American people exhausted by foreign military commitments, the mainstream thinks that this spending spree is toast. The sector is off 13.6% from its April highs, compared to an 8.6% drop for the S&P 500, causing many of its dividend payers to trade at attractive prices. Over this same period, L-3 Communications
Dig for value
Since the end of 2009, when natural gas prices were just below $6 per million Btu, prices have steadily fallen and are now below $4. Naturally, natural gas exploration and production companies have felt the pain; as prices drop, the economics of drilling become poorer. Nevertheless, the persistent chatter of the U.S. becoming energy independent and the slow adoption of expensive green energy mean that natural gas is the best viable alternative.
Who doesn't hate homebuilders?
The mere mention of this sector probably caused most readers to stop reading this article -- but if you're still with me, I'd like to talk about a homebuilder with brains and cash. NVR
NVR accomplished this by employing a unique business model: It doesn't purchase gobs of land hoping to build on it and sell out. Rather, it buys options on tracts of land and only exercises the options if the market conditions are right. The result? Cash flow in good times and in bad. The company has no debt and has 35% of its market cap in cash. With the first-time homebuyer tax credit now extinct, lousy housing starts and sales numbers may provide an even more attractive buy price for this stud among runts.
One man's trash ...
Defense, energy, and homebuilders -- yuck. Clearly, each of these areas has risks that loom large, and they've paid the price in terms of a share price smack-down. But remember the words of Klarman and Buffett, and don't be afraid to invest against the grain. Do your homework and come to your own conclusions, just as they would, and you can pull your portfolio's returns out of the incinerator.