A contrarian investment is one made in a stock that is getting no love from Mr. Market, nothing more and nothing less. Industry peers may be suffering the same woes as sentiment for a certain industry takes a downward turn or it may be all alone with seemingly no correlation between its market price and that of its closest competitors. Either way, a lot of money can be made investing in companies who are out of favor and even more so when, in addition to its discount, management starts buying up tons of its shares for you.
Situated in two completely different industries Intel (INTC) and Safeway (SWY) offer investors a great return as they are being valued substantially lower than peers and, luckily for shareholders, management has taken this cue and bought up a massive amount of shares.
A look at Intel
Currently valued at only 10xs last year's earnings Intel offers steady earnings and a respectable 4.3% dividend yield. In comparison, Texas Instrument (TXN) is trading at much higher P/E of 23 and only paying out a 2.4% dividend. With a history of purchasing its own shares, Intel bought back an additional $5.11 billion in shares last year after purchasing $14.34 billion the year before. According to its recent 10-K, management is authorized to repurchase $5.3 billion more in 2013 which, with a dividend payout of $4.35 billion, amounts to a return to investors of approximately 10% of Intel's current market value. Something Apple's (AAPL) shareholders could only be envious of! It is also important to note that before the massive repurchase of $14.34 billion in stock in 2011, Intel had built $25.919 billion in cash and investments by the end of 2010. Having ended 2011 with $16.28 billion in cash and investments, its current supply of $23.079 billion might be seen as an indication of a greater amount being bought back in 2013 than is currently scheduled in addition to reaffirming its ability to continue its repurchasing program. Either way, as indicated in the graph below, Intel is trading near its 52-week lows allowing investors a great opportunity to purchase a great stock at what seems to be a very large discount.
A look at Safeway
After repurchasing a massive $1.27 billion of its stock in 2012, approximately 22% of its current market cap of $5.69 billion, management at Safeway has reaffirmed its share buying ways and is authorized to buy an additional $827 million (15% of current market cap) in 2013. While the graph below may indicate a more favorable valuation than that of Intel's, it fails to show how Safeway is currently being valued in comparison to its peers. With a P/E of 32.46 times earnings and a market cap of 15.96 billion, fellow competitor Whole Foods (WFM) is being valued three times more than Safeway's P/E of 10 times and market cap of 5.73 billion. This is substantial considering that Safeway is generating more in net income and operating cashflow than Whole Foods, in addition to the fact that whole foods has been issuing and not purchasing up shares for its investors.
Intel and Safeway have been quietly generating tons of money and returning massive amounts to shareholders while at the same time, being grossly undervalued compared with peers. Because of this, I expect these two cash cows to greatly outperform in the near and long-term future.