"Playing contrarian for the sake of playing contrarian is just plain stupid." This was my quote several months ago on an article about Sirius XM (NASDAQ:SIRI). The odd thing is, as much as I "hate" contrarians, I've grown pretty good at it.
Perhaps "hate" is too harsh of a word, but I find it that (too often) some people wish to make a name for themselves by merely taking the other side of the coin - this is regardless of their own convictions. However, where they may or may not truly believe what they are saying (for the benefit of celebrity), there is often value in what is being said so it should not be immediately dismissed.
Case in point, the tech bubble of the late '90s is a perfect example of how contrarians turned out to be right because they stayed on the sidelines and decided that valuations were absurd while everyone was suggesting to "get on the train." I think some of these same people remain missing from the derailing as they watched their investments burn in the pileup. The point is that I think we have reached a top in the market where we can legitimately become bearish.
When we start a discussion regarding the Dow, S&P500 and Nasdaq with the words "record, new highs, all-time highs, and make decade-length comparisons, I think it just might be time for investors to consider their positions. I will agree that the view of one contrarian is not necessarily better than that of the collective wisdom of a crowd, but I think is those that go against the grain (sometimes) do tend to offer a perspective that otherwise might have gone ignored. After all, I think both sides will agree, that the key to successful investing is extensive due diligence - including those that are not popular.
With that in mind here are some stocks that I think should be looked upon from the contrarian point of view. These have netted enough gains for the year that I feel investors should consider locking in for when (not if) the pullback occurs.
Bank of America
Bank of America
One of the hottest stocks on the market so far this year cannot be ignored. Bank of America has netted a remarkable 35% gain, and many (including me) are expecting more. However, any sudden market pullback has the potential to send shares back toward the $6 level. For this reason, I think it is prudent for investors to take some money off the table.
For those who are in for the long haul, to truly consider the optimistic recovery for Bank of America, the best bullish case that I have read so far on the year comes from Fellow Seeking Alpha Contributor Spencer Knight, who offered from both a fundamental as well as a detailed technical perspective on why BofA has a bright 2012. Last week, during its fourth quarter earnings announcement, the bank gave investors many reasons to believe that a bright outlook for the year was indeed possible by reporting a profit of $2 billion for the quarter. It came after having posted a loss of $1.2 billion during the same period last year.
Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010. For three months prior, the primary question surrounding the company was, can it execute its business effectively enough to make any money? Since that question has clearly been answered, the new question is, can it build on this momentum? I think that is what investors are waiting to see before pushing the shares higher. As great as the recent quarter was, it goes without saying that Wall Street always prefers trends.
For streaming movie giant Netflix, I am unsure of how to truly place a value on its future potential. But one thing that I am certain of is that its recent run-up of 80% is highly unusual. The obvious question that should be asked in making an informed investment decisions should be: Have the concerns that caused it to drop from $300 to below $69 been addressed? The answer to this is no. But it does not seem to hinder optimism that the company can fix its problems. Another question is, is this optimism justified? That remains to be seen.
However, to its credit, it's doing its part to show that it can run its business effectively as evident of its recent Q4 earnings report - one that arrived better than expected. For Netflix it was like night and day from one quarter to the next. The company said that it has gained more than 600,000 subscribers in the fourth quarter. This compares to the 800,000 that churned out in the third quarter, which resulted in the stock plummeting to its recent lows. Things are indeed starting to look up, but strictly from a valuation standpoint, I continue to feel that the recent gains should be immediately locked in.
With a 20 percent gain over the past several months, it is time to lock in profits in database giant Oracle this is although my long term target remains $35. Thanks to the Fed, one of the advantages of lowered interest rates is that it allows businesses to borrow more money at lower rates. When companies are able to borrow, they are able to spend on improvements that bring efficiency to the enterprise. This is where a return of tech spending will help firms such as Oracle, where it specializes in cloud computing services. However, the company still has its own challenges to deal with as is evident by its recent earnings report.
In the quarter ending November 30, the company reported a profit of 54 cents per share, while analysts were projecting profits of 57 cents. The bright side of the report was that new software sales rose slightly - 2% year-over-year to $2 billion. Management had also reported that it expects hard revenue declines of 5% and 15% while projecting new software sales growth of flat to 10%. It was this earnings disappointment that served as a catalyst for the stock's drastic decline. But I tend to think that the company now presents a tremendous value.
With the stock now trading just under $29 after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions.
Last Thursday, the satellite radio giant reported earnings that arrived "mixed." I suppose for the foreseeable future, "mixed" is the way it should be described depending on through which lens its numbers are scrutinized. To the bulls, the numbers were great. However, to the bears, they were anything but respectable. But regardless of who you chose to believe, it is fair to say that nobody's mind is going to change any time soon.
As down as I am so far on Sirius, I am not ready to say that the company will not be successful. It indeed has some challenges and it needs to address some of its key concerns - a lot of which has to do with (as I've stated many times) its poor image. The 1.3 million net subscriber guidance that it gave was an example of an underdog mentality. The company's major problem is that it still operates as a "long shot" when it can do things to remind investors that it can (indeed) win.
I am still waiting to hear back from Sirius regarding the 8 questions that I've submitted to investors relations following the announcement. I hope these answers will shed some light on what I think is a good company and one that is deeply and sadly misunderstood by both longs and shorts. I think Sirius will eventually break $2.18, and then trend higher, because my target remains $2.50. But in the near term, absent some sort of anomaly, it will unlikely happen until the company raises guidance and give Wall Street what it wants by hitting major league home runs in major league parks. Simply put, Sirius needs to raise its own level of expectations, and it can start by addressing some of the points above.
I am bullish long term on Alcoa, but I think it is also time to take some profits off the table. I think the trader side of me has over taken what I think is a great company long term. But in the near term (before the market pulls back) it is hard to ignore its YTD gains. However, for those with a not so (admittedly) narrow view of the market, here are some things to consider for the company.
The case for Alcoa is simple: Aluminum will always be needed in our everyday lives. When you couple this fact with the company's shares being undervalued, it makes for a great investment. Investors need to consider that Alcoa's stock is worth slightly more than the $9.65 billion in tangible book value on its balance sheet. Yet that book value figure is quite understated because the value of a number of manufacturing facilities has been written down due to depletion. In terms of replacement value, if one were to build Alcoa's factories from scratch, then you're likely looking at a market value closer to 40% lower than the real value of the company's assets.
Equally important, Alcoa should remain free cash flow positive, even if the global economy slumps further in 2012. A weak economy would actually benefit Alcoa as higher-cost rivals get flushed out. As it stands, many aluminum producers are operating at a loss with aluminum trading for roughly $1 a pound. That's a price point at which Alcoa can still turn a profit. The fact of the matter is aluminum and many of its characteristics are needed in several large business productions mainly for its high strength to weight ratio as well as its ability to resist corrosion. Because of this, several large companies should become large consumers of aluminum as they evolve into utilizing it more into large consumer items such as vehicles and home appliances.