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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.





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