MEMC Electronics: Hated but Misunderstood Contrarian Stock Investment

Jun. 3.11 | About: SunEdison (SUNEQ)

By Ryan Cole

Sometimes the best investments don’t require fancy math tricks or even a deep understanding of global trends – they just stand out when you step back and take a slightly longer view than the Wall Street norm.

As an example, let’s look at one company in particular.

  • Its share price is below book – meaning that if it never made another dime and was dissolved and sold for parts today, it would fetch a higher price than it currently trades for on the market.
  • It suffered a loss last quarter – but that’s because of one-off legal findings and a one-off manufacturing shutdown in its factory in Japan, thanks to the massive earthquake that hit the country earlier this year. That factory is already back online, and production has ramped back up to pre-quake levels.
  • The company has a nice mix of revenue streams – and each is growing steadily. One stream has seen sales increase 15 percent since last year. Another stream is up 17 percent since last quarter, and has more than doubled since last year.
  • Overall, revenue increased 68 percent since last year – even with the quake taking out a significant portion of manufacturing.

Those numbers are encouraging enough. But, if you bother to look a little deeper, you’ll see that the company is in a very fruitful industry indeed.

MEMC Electronics (WFR): An Example of the Hate Principle

The company we’re talking about is MEMC Electronics, which makes silicon wafers used in semiconductors and solar materials. MEMC creates its own solar energy as well. While solar energy still makes up a tiny fraction of overall energy in the United States and elsewhere, remember this: Bloomberg projects solar energy to grow 34 percent per year over the next 10 years. That isn’t unbridled optimism. That fits right in with what solar has been doing over the past 10 years.

So why is this company available for less than book? The simple answer: The markets aren’t as efficient as most people believe. Indeed, it’s exactly these sorts of opportunities that luminaries like Warren Buffett look for when picking stocks. A basic tenet of Buffett’s investment strategy: Find companies with a solid base that are hated due to one-off conditions, which will soon dissipate.

Of course, MEMC is only one of a number of companies that fit this bill. The key is to look for companies that have bad publicity due to one-off problems … or temporary problems that have an easy fix in the pipeline.

An Undervalued Company for Savvy Contrarian Investors

MEMC is a great example today. Around this time last year, BP would have been a good buy using the same principle. (BP is up more than 15 percent over just the last six months.) Plenty more abound – and, as of this moment, companies that took a significant hit due to Japan’s earthquake are proving a fertile ground for savvy, contrarian investors.

What’s more, these types of opportunities always exist. Look for bad publicity – or unfounded hatred – and you’ll consistently locate undervalued companies. Make it a habit, and you’re already ahead of the greater majority of Wall Street. Just remember to take a slightly longer view.

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