On the contrary

Making a point of not following the crowd can pay off

February 15, 2004|By Novelda Sommers

When the crowd loses confidence in a stock, contrarians get interested in it. They swoop in where others are fleeing, hoping that as the price is driven down they'll get a bargain, and when the dust clears the price will rise again. This kind of investor ignores conventional advice, and perhaps even his gut feelings, to invest in current losers.

"Looking at things no one else wants to buy is a good philosophy," said Paul Bracaglia, partner in Pricewaterhouse-Coopers' investment advisory group. It may be smarter than climbing aboard an accelerating stock, because "nothing goes up forever," he said.

But investors who reject Wall Street group-think these days to buy out-of-favor stocks have to look harder for bargains after a year when most sectors in the Standard & Poor's 500 gained.

Contrarian investors -- the kind of people who buy sweaters in the spring and bathing suits in the fall -- might be looking to the following industries for deals.

Conversely, stocks in other sectors may not be good candidates for contrarian purchase at this point.

Underperforming sectors with appeal

Big pharmaceutical companies

Recent average gains have been weak compared with long-term gains. Competition from generics, questions about the pipelines for new drugs and bad press have dogged the industry. There is also apprehension among investors about whether lawmakers will do more to regulate drug prices.

Retail grocery chains

Wal-Mart's grab for larger numbers of grocery shoppers across the country has pushed stock prices down. Safeway blamed competitive pressures last year when it said it would cut workers' health benefits at its Southern California stores to keep prices low as nonunion Wal-Mart built more supercenters in that state.

Grocers there have lost millions of dollars in sales because of a subsequent labor strike. So grocery chains will be forced to come up with ways to compete with the world's largest retailer, said Mike Huffman, vice president at Fraser Management Associates, a Burlington, Vt.-based investment firm that hosts Contrary Opinion Forum, an annual meeting of about 200 U.S. and Canadian economists and investors. If grocers can come up with solutions, a little bit of improvement will go a long way in this low-margin industry, he said.

"I don't think it's Wal-Mart's destiny to capture every dollar in the U.S.," Huffman said. "So the $64 question is, can the likes of Kroger, Safeway and Albertson's respond to the Wal-Mart challenge?"

Integrated telecom

The class of business that includes, for example, Verizon Communications is increasingly competitive. Companies in this sector will need to keep up their cash flow and still fund new capital investment needed to stay competitive. To respond to demands of new technology, integrated telecom companies invested more than they made last year, Huffman said. "They are out of favor," he said. "That's why you look at them."

Stocks to make contrarians nervous

REITs

Real estate investment trusts have been on a tear for several years.

Whether investors see them as dividend providers, as carrying less risk or as inflation hedges, there is a price at which REITs will not deliver the gains people hope they will, Huffman said. "We're probably pretty close to that price," he said.

Technology

The sector was up 46 percent after losing for the prior three years. The tech-laden Nasdaq broke 2000 in December for the first time in nearly two years, helped by recoveries of industry giants such as Intel. Analysts say the sector is unlikely to recover to levels seen before the bubble burst.

"We would be real cautious about what new technology stocks we were going to put to work, because they run so much," said Katherine C. Willis, a certified financial adviser with Virginia Investment Counselors, a Norfolk, Va.-based division of BB&T Asset Management Inc.

Natural resources

Over the past year, metals in particular have been driven higher by expectations of increased demand worldwide. After bottoming out in March 2003, the S&P 500 had risen 34 percent by the end of January, while the metals and mining index rose 74 percent.

"Commodities are usually regarded as things you would get into before a rebound," said David Givens, an economist with Economy.com. "It's hard to imagine there's much more upside potential there for those stocks."

Better luck next year

As the warning goes, past performance does not necessarily indicate future results. Indexes measuring three underperforming sectors increased an average of just 10.7 percent from Feb. 1, 2003, to Feb. 1, 2004.

AMEX Pharmaceutical Index - +14.5%

Fidelity Grocery Stores Index - +14.2%

S&P's 500 Integrated Telecom Services Index +3.5%

Thanks for the memories

Three indexes measuring sectors for contrarians to avoid this year went up an average of 46.4 percent from Feb. 1, 2003, to Feb. 1, 2004, beating the S&P 500 index's rise of 31.5 percent.

Morgan Stanley REIT Index +47.5%

CBOE Technology Index +60.6

Goldman Sachs Natural Resources Index +31.4%

Source: Bloomberg

Novelda Sommers is a staff writer at the Daily Press, a Tribune Publishing newspaper, in Newport News, Va.

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