Contrarian Ideas

The majority of articles that I’ve written are concerned with finding the best investment vehicles when they are most in demand, hence the focus on relative strength and momentum.

There is another school of thought that views investments from an entirely different perspective, that is from a contrarian and necessarily longer term horizon. Investing in businesses that are currently out of favor requires great patience and some confidence in the long term fortunes of the company or industry.  When looking at investments of this sort, one expects many multiples of return on their investment over the longer time horizon.

While it’s useful to have some kind of fundamental basis for investing in the longer term outlook for an industry, I would still only consider such investment if there were some technical evidence that a long downtrend or flatline for a company was about to change.  After all, a stock can stay cheap for a long time and unless there is a reliable dividend payout,  the opportunity cost can be substantial as compared to a dynamic market of growth stocks…not to mention corporate bankruptcy.

Still, the big attraction to contrarian investing is the ability to accumulate a valuable company at historically cheap prices. Naturally, one needs to have a longer time horizon to allow the scenario to play out.  Bear in mind that part of the reason that stocks fall to cheap prices is that investors believe that their futures are cloudy and some may even disappear entirely.  This is of course, possible.  But fortunate or shrewd assessments of a company’s future can pay big rewards if a positive scenario unfolds as projected.   Some famous investments of this type include the purchase of Citicorp by Saudi Prince Alwaleed in the late ’80’s when the banking industry and Citi in particular was very  distressed.   The stock eventually rose from the $8 dollar area to reach over $460 dollars per share by 2007.  Another is the rising of Chrysler from the ashes when Lee Iacocca came on board during the late 1970’s.

Even more recently, present market darling AMD was a long time dog trading often at the $2 level for years.  As recently as 2016, it was still trading below $3.  Today, the stock trades in the mid $50 area.

At any given time, certain market sectors are very much in favor, such as semi conductors are now, while there are some that are very much out of favor.

One such sector which is entirely out of favor now are the energy stocks. While this group has not gone through a grinding, dull market, the industry as a group has fallen precipitously from their heights over the years and especially so in the last few months.  In order to gain some perspective on the ranges of these stocks, a select group are illustrated below for comparison.  Note that we are using very long term charts to give an idea of extreme of movements.

Within the major integrated oil companies, XOM, CVX and BP have seen precipitous declines in just the recent few months.  Interestingly, they have fallen back to very long term previous levels of support.

XOMBPCVX

To be even more contrarian, some of the largest drilling companies have fallen on even harder times and we show SLB and HP as illustrations of that group

SLBHelmrich

Note the long term areas of support that these issues have fallen to; areas that have been very significant in the past.  In order to fine tune the timing of these investments, we default to our usual tool chest of volume and price movement studies on the smaller time frames along with accumulation and momentum statistics.  As we’ve recently seen, a sudden unforeseen change in supply dynamics can significantly affect pricing.  With proper risk tactics, such contrarian trades can be explosive.

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