A notable practitioner is Third Avenue Funds, headed by the legendary Martin Whitman. In Canada, the Contra The Heard team are adherents. And as I recall, Peter Lynch used to do this too. All have reputations for outperforming the market over the long term.
How does it work? When firms in a beleaguered industry exit or cutback production, their market share defaults to the survivors. The survivors, in a sense, are growth companies in the unlikeliest of places -- a declining sector.
One drawback to investing in these kinds of companies is that a lot of patience is required because the process of industry rationalization and consolidation can take time to unfold. Making a killing can take a few years.
Which brings us to the forestry industry in Canada: it’s so cheap and off radar screens that member companies are trading at three to six times earnings and below book value. No one wants to go near lumber suppliers when the U.S. housing sector is imploding and Canadian dollar is rising; paper suppliers are outcasts because the world is switching to the Internet.
Going by Third Avenue’s and Contra the Heard’s picks, the “last-man-standing” companies in this sector should include Catalyst Paper Corp., Canfor Corp., and Abitibi Consolidation Inc. (ABY-OLD)- which also trades on NYSE. Third Avenue is into Catalyst and Canfor big time, owning approximately one-third and one-quarter of their shares, respectively.
ABY 1-yr. chart:
Related Articles: Abitibi/Bowater Merger Update; Coated Paper Duties Could Send Abitibi and Bowater Higher; Abitibi's Better Than It Looks on Paper - Barron's; Abitibi: Ugly Paper Duckling Can Become a Swan