Many investors lose sight of the fact that the best gains are made by buying assets when they are out of favor. It's human nature to be attracted to "shiny objects". For investors that would be stocks that everyone is talking positively about, stocks that have been making money for their shareholders, stocks that make you feel good, etc. Assets move in and out of favor, and if you step away from the current market noise, it is easy to find and invest in stocks or asset classes that might be out of favor now and available at bargain prices for the long term. To give an example of how investments move in and out of favor, consider the price of gold and silver. I bought silver at about $4 an ounce and gold around $300 per ounce many years ago, when there was very little interest in these metals. I remember some dire predictions for these metals and projections that they would always be terrible long term investments. All that has changed now, and I only wish I had bought more gold and silver when almost nobody wanted it.
With this in mind, I am making investments in stocks that few investors have any interest in now. These stocks are facing various challenges and can be purchased for what might amount to a bargain price if you look forward a couple years or so. You will always pay less for an investment if you buy when things aren't looking so great, and when you are not competing with excessive interest from other investors. That is the allure of these contrarian investments. I believe all of these stocks face challenges and current investor pessimism, that will be positively resolved over time:
Bank of America (BAC) shares are trading at $12.31. The 50-day moving average is about $13.81 and the 200-day moving average is about $13.31, so these shares are trading below support levels now. Earnings estimates are about $1.33 for 2011 and $1.87 for 2012. This gives BAC shares a PE ratio of only about 10 times earnings. The dividend is 4 cents per share per year which is a yield of about .3%.
Why you'll probably wish you bought Bank of America: BAC shares have dropped recently, over earnings that disappointed and due to news that the Federal Reserve denied its plan to pay a higher dividend. You can read about this here. In time, BAC shares offer rebound potential, a dividend that is likely to grow, and a low PE ratio. These shares are trading below book value and although earnings continue to be impacted by mortgage defaults, it is only a matter of time before this bank returns to much higher profitability levels. Right now, we all have a chance to buy this major American financial institution at a bargain price. Even with all the mortgage and other challenges, this bank is making money now, the book value is growing, and each day is one step closer to normalized earnings. (Normalized earnings being earnings that are no longer impacted by significant mortgage and other loan losses.) In my opinion, it's only a matter of time before this bank is earning at least $2.50 per share.
Nokia Corp (NOK) shares are trading at $8.63. Nokia is a leading mobile phone company. The 50-day moving average is about $8.67 and the 200-day moving average is about $9.68. Earnings estimates for NOK are just over 70 cents per share in 2011, and 80 cents for 2012 so the PE ratio is about 12 on these shares. Nokia pays a dividend of about 46 cents per share which is equivalent to a yield of 5.4%.
Why you'll probably wish you bought Nokia: Apple (AAPL) has exerted tremendous dominance over the smartphone market, and this has led most to believe that other phone makers will be left in the dust. Nokia makes high quality phones and they are affordable. Nokia has tremendous opportunities to target emerging market countries and this is where future growth can come from. Most people in emerging market countries don't have the income or desire to spend money for the iPhone, especially since the monthly data plans are much higher than they are for standard phones. Expectations are very low for Nokia, so if its partnership with Microsoft (MSFT) to produce Windows-based smart phones go better than expected, these shares could rise significantly from these low levels. It's a mistake for investors to think that Apple can be the only winner in this sector. Nokia's balance sheet is very strong, with many billions in cash. With a yield of over 5%, the dividend is a solid incentive to hold the stock.
Stewart Information Services Corp. (STC) is trading around $10.75. Stewart is a surety and title insurance company and is based in Texas. The 50-day moving average is $10.75 and the 200-day moving average is $10.78. These shares have traded in a range between $7.79 to $14.86 in the last 52 weeks. Earnings estimates for STC are just over 43 cents per share in 2011, and $1.28 for 2012.
Why you'll probably wish you bought Stewart Information Services: This company has been impacted by the downturn in the real estate market. This stock regularly traded for $30 to $40 per share before late 2008. While I don't expect it to return to those levels, it could easily trade around $20 to $25 per share within a couple of years. In the short term, STC could rise due to a short squeeze. According to the latest data on shortsqueeze.com, there are almost 2 million shares short. Based on average volume of just over 72,000 shares traded per day, it would take about 27 days worth of volume to match the number of shares short.
Nutrisystems, Inc. (NTRI) shares are trading at $14.36. Nutrisystems provides weight loss systems. The 50-day moving average is $15.11 and the 200-day moving average is $18.39. These shares have traded in a range between $13.05 to $24.90 in the last 52 weeks. Earnings estimates for NTRI are 46 cents per share in 2011 and 95 cents in 2012. The dividend is 70 cents per share per year which is a yield of about 4.9%.
Why you'll probably wish you bought Nutrisystems: This stock dropped hard when the company reported earnings that missed expectations several weeks ago. Nutrisystems went too heavy with promotional marketing, which lowered profit margins. Expectations are very low for Nutrisystems, so if management is successful in increasing profit margins going forward, these shares could rise significantly from these low levels. With a yield of nearly 5%, the dividend is a solid incentive to hold the stock.
Goldman Sachs Group, Inc., (GS) shares are trading at $153.51. Goldman Sachs is a major investment banking company based in New York. The 50-day moving average is about $160.46 and the 200-day moving average is $157.51. Earnings estimates for GS are $14.64 per share in 2011 and $19.15 in 2012. The dividend is $1.40 per share per year which is a yield of about 1%.
Why you'll probably wish you bought Goldman Sachs: This company has had some major challenges in the past three years, but it has survived and I am confident it will find ways to prosper in the future. This company recently reported earnings which disappointed some investors, but I think it makes sense to take a longer term view. The book value for Goldman is about $130 per share, so the opportunity to buy for only a small premium over book seems enticing. This is especially true if you consider that a year or so from now, the book value will be close to $150, as earnings from the coming year will add to the book value. The PE ratio is about 8 based on 2012 earnings, which is way too low for an investment banking firm of this caliber. To learn more about the earnings and future prospects of this company read Mark Riddix article on Goldman Sachs here.
Disclaimer: The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes only.