Different drummers

Contrarian investors go outside the traditional approach, stepping away from `emotions'

Your Money

July 09, 2006|By ANDREW LECKEY | ANDREW LECKEY,TRIBUNE MEDIA SERVICES

If you'd consider it foolhardy to invest in a Florida real estate company this year, you're not a contrarian investor.

Contrarians buy sandals in winter, snowshoes in summer and openly scoff at all the "index huggers." They saw the Internet bubble for what it was and refuse to chase anything on a Wall Street buy list.

While value investors seek promising stocks selling at low prices, true contrarians are students of psychology who move in an opposite direction from either market optimism or pessimism. Yet they're nobody's fool, only going against the grain if they first calculate the odds to be in their favor.

"Being contrarian means thinking independently and stepping away from emotions that rule Wall Street," said David Winters, manager of the $370 million Wintergreen Fund, up 4.8 percent this year. "Wall Street is an incredibly moody place where facts often don't matter in the short run, which can sometimes create enormous anomalies."

Winters launched Wintergreen in October after building a successful track record as a contrarian manager with Mutual Series Funds.

"People ask why I don't invest in a large-cap pharmaceutical stock, since that's certainly contrarian, but I point out that simply being contrarian doesn't make something a good investment idea," said David Decker, manager of the $3.6 billion Janus Contrarian fund, up 5.4 percent this year with a three-year annualized return of 23 percent. "Some stocks are out of favor for good reasons, and the market may be right."

His strategy: Determine what the market is thinking, decide if that assessment is accurate and ponder the future to come up with a range of outcomes. It's important the stock is cheap, and that risk can be minimized.

Rampant fears about interest rates, the economy, and real estate, especially Florida real estate, have contrarians licking their chops in 2006. They see a buying opportunity because of the market's extreme negative position.

The past market euphoria over Consolidated-Tomoka Land Co., a developer of real estate in the Daytona Beach, Fla., area that includes residential, oil, mineral, timber and golf properties, ended abruptly. Earnings are down, and its stock price has declined 25 percent this year. Yet even with a slowdown, this devalued stock is attractive thanks to outstanding long-term prospects for its area, Winters contends.

The St. Joe Co., owner of 800,000 acres being developed in northwest Florida and a forestry division, is one of the largest stock positions in Decker's portfolio. The intrinsic land value is being pegged at a fraction of what Decker computes it is worth. Weaker sales of resort residences socked earnings, and the stock is down 30 percent this year, but this large firm doesn't have to sell its land tomorrow and can wait out economic downturns, Decker said.

"Everyone at the cocktail party agrees with you when you believe in the consensus," said Winters. "The few of us who weren't sucked in by the Internet bubble got a lot of grief, but mental discipline enables you to have the courage of your convictions."

Contrarian logic extends beyond real estate.

In a rapid six-week period the market in many commodities went from wild enthusiasm to depression, hammering the stocks of major producers, Winters noted. Yet stock of Anglo American PLC, which owns 45 percent of the DeBeers diamond producer and has platinum, gold and coal operations spanning 64 countries, now is even more attractive because nothing changed except Wall Street sentiment.

In the past, Decker purchased Apple Computer Inc. stock because it was a great brand selling at a low price with few expectations and little downside. That was before the iPod, so he had underestimated the company's future.

"Since contrarian investing is the most effective at the extremes, wait for the majority opinion to reach an extreme and then assume the opposite position," said Andrew Pilara Jr., senior portfolio manager of the $1.7 billion RS Value Fund, previously known as RS Contrarian Value Fund, up 4.4 percent this year, with a three-year annualized return of 25 percent.

If you're always investing with the crowd, you won't get any bargains, said Pilara. His largest holding is Corrections Corp. of America, the nation's biggest provider of corrections management to government agencies. While most people at cocktail parties don't consider corrections sexy, that stock is up 16 percent this year.

David Dreman, who wrote the book on contrarian investing with his Contrarian Investment Strategy in 1980, always avoids expensive growth stocks with hyped earnings predictions. He runs the $7.6 billion DWS Dreman High Return Equity Fund, up 5.4 percent this year, with a three-year annualized return of 14 percent.

Tobacco giant Altria Group has been a big winner as the fund's No. 1 holding, even though there are always some litigation concerns. Operating on Dreman's assumption they've been overly punished, the out-of-favor shares of Freddie Mac, Fannie Mae, Merck & Co. and Pfizer Inc. are in his portfolio.

"Dreman says oil is actually a contrarian play because he thinks share prices are still reflecting unrealistic low oil prices," said John Coumarianos, fund analyst with Morningstar Inc. "Many contrarians are willing to go out on a limb building big positions and don't worry about sector weightings."

Andrew Leckey writes for Tribune Media Services.

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