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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 815 posts from scratch.

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When Do Contrarian Investments Work?

A recent article in US News and World Report looked at eight potentially profitable contrarian investments. That got us to thinking. When do contrarian investments work and when are they just value traps? In a recent article we asked, are there any cheap investments left? In it we visited the same issue from a slightly different viewpoint. Here are the contrarian investments suggested Bank of America and reported by US News and a few thoughts about each one as well as contrarian investing in general.

Contrarian Investments to Check Out

In their article, US News writes about stocks that are “due to bounce.” They offer stocks that are down at least 35% year on year. They consider why the stock is down and why they believe it will recover and grow even more than before. Here they are:

CBS

CBS has spent heavily on content which has reduced its bottom line. It also just merged with Viacom. As we noted in our article about Disney, content is increasingly important. As such the investment in more content can be viewed as solid planning for the future. And the Viacom merger can be seen as another positive strategic move. As such, the folks at Bank of America and US News are offering a target price of $63 for this stock that currently goes for $38.

The problem is that this is a very competitive environment with more and more people getting their entertainment and news online instead via the TV set. The question is if CBS can prosper in a world dominated by Disney Plus and Netflix.

Mosaic

This is a large fertilizer company that is a leader in production of potash and phosphates. Its stock is down more than 40% from a year ago. We don’t see this stock so much as a contrarian bet but as a cyclical stock whose value goes up and down with the needs of agricultural producers. This last year has been terrible for US agriculture with too much rain, too much heat, and being cut off from markets for soybeans, especially, in China. As conditions improve, they will be selling more fertilizer and making more money. The issue is that they are not a long term growth prospect as the stock started 1994 at $20 a share and that is what it sells for today despite being as high as $150 very briefly in 2008.

When Do Contrarian Investments Work?

Back in the last 1980s Warren Buffett lots of Coca Cola stock when it was a contrarian bet. His investment, like all of them, was based on an assessment of intrinsic stock value. His Coca Cola investment turned out exceptionally well because the company has grown even more and not turned into a value trap. Our concerns about both of the investments we mention here, as well as others mentioned in the article, are generally reduced in price for good reasons and do not have a clear path to long term prosperity in excess of what they have demonstrated over the years. In short, when contrarian investments work is when they have the prospect of strong long term earnings.

Are There Any Cheap Investments Left?

The ever-higher stock market has made lots of folks rich and is worrying more than just a few. For anyone with money to invest in the stock market right now, there is a real risk of getting in just as the bottom falls out! We could be looking at a decade, like the one running up to the Financial Crisis in which the stock market will be relatively flat. As such, the task of the investor will be to find cheap investments with the potential for growth. But, are there any cheap investments left?

Finding Cheap Investments That Are Good Investments

When looking for cheap investments, investors need to constantly remind themselves that many cheap investments are really just value traps as they are cheap for good reasons. When are cheap investments the best investments? What you are really looking for are investments with good intrinsic stock value. The best stocks to invest in are those whose intrinsic value (based on forward-looking earnings) is substantially higher than their current stock price. This usually happens when the market reacts to temporary factors and discounts the stock. Here is a possible example of such a case.

Cheap Stocks Right Now

The Motley Fool writes about a couple of stocks that are absurdly cheap at this moment. The two stocks that they discuss are SciPlay, a smartphone game maker and Malibu Boats, a speedboat manufacturer. In the case of SciPlay, the market is looking at revenue growth instead of profits and discounting this profitable company. In the case of Malibu Boats, the market is concerned about two recent acquisitions at a time when recession fears are a real concern. However, these are both profitable companies with strong positions in their respective niches. So, if you are wondering are there any cheap investments left, take a look at either of these too. The Motley Fool article as more details.

Accurate Investment Valuations in an Aging Bull Market

The key to finding cheap and profitable investments in this market is being able to determine an accurate value of the stock going forward. So many stocks today are valued based on steady earnings growth. What happens if that growth cools off? Others are being propelled upwards by stock buybacks. What happens when the company does not have the cash to keep buying back their stock? Market Watch notes that while stock valuations have meant nothing for years, they are becoming important now.

While inaction has been the best course of action since the bull market in U.S. stocks began in early 2009, the risks have now piled up. According to my research, there’s a chance of near-zero returns for most stocks during the next 10 years and a very high likelihood of a 50% collapse at some point.

The risks of a prolonged trade war as well as other investment risks for 2020 and after are such that investors will do well to look at stock valuation and forward-looking earnings in both their current portfolio and any prospective stock purchases.

Investment Risks for 2020 and After

What investment risks should you be concerned about as we head towards 2020? The prospect of a permanent trade war should be high on everyone’s list. And, anyone who has ridden the bull market to higher and higher profits over the last decade may wish to take a little off the table as we noted in our article about when it might be time to stop investing. But, there are other investment risks for 2020 and after which will become increasingly worrisome if not addressed and dealt with. The first of these is the widespread inequality in wealth, income, and access to health care.

Investment Risk of the Current Distribution of Wealth

If you think that your wealth is safe from confiscation by the government, you are wrong. Going back a century there were families in Great Britain who owned estates the sizes of large U.S. counties. These were “taxed away” with each passing generation so that now the survivors of these once-great families live in one wing of the old estate while the National Trust runs the rest of the buildings and grounds as a museum.  John Steinbeck once noted that even the poor in the U.S.A. view themselves as temporarily dispossessed millionaires. Thus, he did not think that the U.S. citizens would revolt or that the government would adopt confiscatory measures as in Great Britain. Now when Bernie Sanders and Elizabeth Warren talk about paying for health care and other things with increased taxes on the uber-wealthy, people are listening and supporting their campaigns. Add to this an increasingly-unpopular president soon to be impeached, and you have a potential recipe for investment disaster.

Investment Risk of the Current Distribution of Income

Trump and the Republicans crow about the lowest level of unemployment in more than half a century but fail to mention that so many of the new jobs are with low wages and none of the benefits that came with jobs a couple of generations ago. People who rent in places like San Francisco are living in the last apartment they will ever live in within that city as they are only protected by rent control from being priced out of the housing market. All of those folks with low wages who are living paycheck to paycheck can vote. And, one of these times around they are going to elect enough representatives, senators, and a president whom they believe will rectify things. When that happens, the safety of your investment portfolio could be at risk.

Investment Risk of the Current Unequal Distribution of Access to Health Care

This is another area where many people are hurting. The health care benefits that were so common in another era are gone for most people. And, at the same time, the cost of care has risen dramatically. In this case, we might expect higher taxes on the wealthy as part of the package to provide more access to health care. But, we might also see confiscatory regulations in regard to the pharmaceutical industry and health care providers.

How Do You Deal with Investment Risks for 2020 and After?

Part of your investment planning should be to decide which investment sectors will not be targeted by overly-zealous attempts to rectify perceived social injustice. Because there is not enough money in the investment portfolios of the super-rich to pay for the things that Warren and Sanders want to do, we can expect them to have to borrow. This will drive up long term interest rates but likely lead to inflation such as in the 1970s. Could this be a good time to be looking at gold as an investment again? Real estate might be a better choice.

Investments That Have Nothing to Do with China

Just the other day the stock market rallied on news that the USA and China were close to an interim trade deal. And then the market slides back on news that there would be delays and problems. Thus, any of your investments that have anything to do with China are being held hostage. In the short term, political gamesmanship is the major factor but over the long term, there are very deep and permanent issues that each nation is fighting for in this matter. A year ago we posed the question, what happens to your investments if the trade war becomes permanent? In that article, we looked in some detail at the issues of global power, military dominance, and economic hegemony that China and the USA are fighting over under the guise of a trade war. The point is that the trade war will be with us for the rest of our lifetimes and longer. Thus, picking investments that have nothing to do with the trade war is a good idea, at least for part of your investment portfolio.

Investments That Have Nothing to Do with China

CNBC was thinking along the same lines when they suggest that you should own stocks that have nothing to do with China. Three suggestions that they offer include Sherwin-Williams, Waste Connections, and Zoetis.

These picks make up an odd trio of companies in waste management, home construction, and animal health, but the strategy connecting them is: “You can own all sorts of names that are not related to the China deal that are still growing earnings 10 percent.”

The common factor with these investment options is that they all do business within the USA, are not dependent on materials or products imported from China or sales in foreign markets.

And, these stocks have other attractive features. For example, Sherwin-Williams barely noticed when the financial crisis occurred and the market crashed. And, its stock price has gone up from the $50 range to the $550 range since that time! Waste Connections is another stock that barely flinched during the 2008 market crash and has gone up from being a $13 stock in those days to a $90 stock today. Zoetis has only been listed for six years but has gone up from $33 a share to $120 a share during that time. And, it does not jump up and down with every innuendo in the trade war.

Investments That Will Detach Themselves from China

In our article about investing during a protracted trade war we noted that that the ABC (anywhere but China) movement is taking hold. As this advances, we will see more and more companies that are not dependent on China for their supply chains including raw materials and for their markets. This will add to your list of investments that have nothing to do with China but do have access to international markets.

When Is the Time to Stop Investing?

No Profit Until You Take a Profit

You may be already wondering what this question is doing on a website that provides help with investing and investments. But, there is a point at which transitioning your investments away from opportunity and risk to reduced opportunity but safer investments makes sense. We wrote recently about the silent warning from Warren Buffett in that he is finding few attractive investments these days and as a result is stockpiling cash. In a more-immediate timeframe, Jim Cramer, the former hedge fund manager-turned TV investment personality, always notes that you do not have a profit when investing in stocks until you take a profit! The Motley Fool recently published an article on the same theme.

When Is the Time to Stop Investing?

The article by The Motley Fool is entitled, Once You’ve Won the Game, Quit Playing.

Despite the stock market’s history of wealth creation over the long run, on a day-by-day basis it can be quite volatile. Heck, there are occasionally even decade-long periods when the market winds up below where it was when it started. If you still have time before you need to get at your money, you can deal with that volatility. In fact, with time on your side, a drastically down market can be a great time to go value hunting for cheap stocks.

While that risk is real, currently, we’re still benefiting from the longest bull market in history. If you’ve been invested through it, you might be looking at your portfolio today and realize that you’re ahead of where you need to be at this stage in your life in order to meet your ultimate retirement goals. If so, congratulations, you’ve won the game. For at least part of your money, it’s time to quit playing.

You do not need to take all of your money out of the market and you should not be just holding cash. But, as we have written, there are ways to invest without losing any money. Taking advantage of long term treasuries, AAA corporate bonds, and a ladder of CDs insured by Federal Deposit Insurance at your bank(s) can be a good idea. Just as you will balance your stock portfolio, you can balance the maturity dates on bonds and treasuries so that money is always coming available as you need it.

What Do You Lose if You Stop Investing?

If you stop investing in strong companies with the prospects for continued growth, you will lose money by pulling out. But, if Trump’s trade war with China worsens and throws the world into a recession, it could take ten or twenty years of steady growth to come back to where we are today. If you have not invested in stocks with strong intrinsic value, they may never recover from a financial downturn and market crash.

What Do You Gain if You Stop Investing?

If you have already won, as noted by The Fool, you will gain a good night’s sleep every night as you worry and fret less about your investments. As we noted at the beginning, we are not talking about getting out of every investment and holding cash. Rather, we are talking about taking some money off the table and following Cramer’s advice about not having a profit until you take a profit. There are still conservative dividend stocks that are excellent growth prospects at any time and likely to continue to keep paying dividends for decades to come.


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