Playing contrarian for the sake of playing contrarian is just plain stupid.
This was what I said several months ago in an article about Sirius XM (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 - 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 90's 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. You're probably wondering "Cameron, what's your point?" 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&P 500 and Nasdaq with the words 'record, new highs', 'all-time highs', and we then 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 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. In an earlier article, we looked at several technology stocks. In this piece we are going to focus on some healthcare companies.
Merck and Pfizer are interesting considerations here, because aside from the fact that they both pay a respectable dividend, both stocks are sitting at 52-week highs. To me this has always been a sign to wait for the pullback. But with this being a new year and all, I've gotten a new perspective and as I've said previously, I'm putting behind some old myths.
Having said that, it remains hard to assess where either company is and where either might be going. Despite the positives in the stock, there are some concerns of both companies that are legitimate; some of which has had to do with limited R&D pipelines. But despite all of that, I continue to believe that over the long term there will be some value in both stocks.
As big-cap drugs have been laggards for several years, investors have plenty of choice in the space. Much of what can be said about Merck can also apply to Pfizer and vice versa. However, Merck in particular offers a solid dividend payout and a relatively stable, if not exciting, business outlook. While drug companies for the most part have spent many years trying to regain investor trust, it may be time to reevaluate them and appreciate them for the cash flow they do still offer. However, considering that both are near their highs, I would take profits now and wait for a pullback.
Abbott Labs (ABT)
Abbott Labs is one of those names that I can't seem to avoid. It is a solid company with excellent fundamentals, but I think it is a tad overpriced at current levels. The company obtains a great portion of its profits from pharmaceuticals. Nevertheless, this is a company with excellent long-term growth characteristics and compelling drivers for future growth. The company's new stent platform is capturing share from the rest of its peers, and I believe many investors under-appreciate the quality and growth potential of Abbott's diagnostics franchise. With a solid long-term record of cash flow growth, a good return on capital, no major patent issues and manageable debt, I believe dividend-seeking investors stand to benefit a great deal from the standpoint of excellent income and tremendous growth.
Abbott recently announced plans to split into two separate public companies, with one focused on pharmaceuticals and the other on medical products. Abbott plans a tax-free distribution of shares of the pharmaceutical company to existing shareholders by the end of 2012. The businesses that are staying with Abbott are projected to have approximately $22 billion in revenue in 2011. These include medical devices, nutritionals for both children and adults, diagnostic products and generic pharmaceuticals sold outside the United States. The company is targeting double-digit annual earnings growth once the separation is complete. For long term investors this is a great play. But in the near term, there are better entry points on the horizon.
Boston Scientific (BSX)
One of the best turnaround stories in the healthcare sector continues to be that of Boston Scientific. The company is one of the leading producers of medical devices that are used in a range of interventional medical specialties. Its main challenge centers on trying to secure better and decent footing in the drug-coated stent market vacated by Johnson & Johnson (JNJ). Many analysts became optimistic about the company when Johnson & Johnson conceded the market, but Boston Scientific has been unable to prove that it can win in the market. The company needs to show that it can execute and reduce some expenses. That is not often an easy request for companies that rely heavily on R&D. As optimistic as things look for its story, the stock is expensive relative to its peers as evident by its P/E of 20.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.