"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 (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 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. I think Marek Fuchs fits that description slightly. As entertaining as he is, he has presented videos of buy-sell recommendations within weeks of each other with little to no fundamental change in the company. Some of his calls such as on Apple (AAPL) - where he issued sell recommendations - he has often immediately followed it with buy calls. This is the same situation for Starbucks (SBUX), McDonald's (MCD) and Even Ford (F).
I want to say that I respect Marek Fuchs and all of the wonderful people at the Street.com. But I completely disagree with the timing of these videos. However, for any contrarian, 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 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 it 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. In the first part of this article, we looked at several technology stocks, in this piece we are going to focus on some consumer staples.
The first stock within this sector that I'm going to discuss is one of the hottest, McDonald's. Its valuation has long been off "the dollar menu" and it appears that investors are just "loving it." In remarkable fashion, it seems that the stock hits a new 52-week high at least once or twice per week. But the clear and obvious question is, should now be the time to push away from the table? Or in other words, lock in some profits? The answer is yes.
However, the interesting component to the stock's rise is that unlike several of the others that we have discussed, its rise has not been as swift - an observation that makes me think that even if the market corrects, it may not suffer any significant pullback as its current valuation of $100 is also its 50-day average while its 100-day average rest at $95 per share. For this reason, McDonald's continues to be one of the safest bets on the market, but with a P/E of 18, it's hard to call the stock cheap which makes a $5 to $10 correction more than reasonable an expectation.
Retail giant Wal-Mart is up 30% since hitting its 52-week low of $48.31 on August 10 of last year. However, unlike some of the other stocks on the market, it is hard to consider that it can fall prey to any sudden bearish turn since one of its qualities is its ability to thrive in any type of market by virtue of its reputation for offering consumers the lowest prices. So it stands to reason that if the economy makes a turn for the worst, Wal-Mart will still remain one of the most visited retail destinations.
Having said that, (and for some of the same reasons mentioned above) its 30% gain remains glaring and add to the fact that it is right at its 52-week high makes it very likely that investors may chose to lock in some gains at some point - if not sooner. But for Wal-Mart, the downside risk is minimal as the stock is only 3% and 8% above the 50-day and 100-day averages, respectively.
Rite Aid (RAD)
The stock of retail drug outlet Rite Aid is up 36% over the past three months - including a 20% gain on the year. The problem is, nobody has been able to figure out why. The company is still in deep trouble although it has been working to reduce and refinance its debts. It has instituted programs for increasing sales along with closing some stores, but has not been able to generate any profits, and it there is little confidence that it can.
Since bottoming out at $0.85 cents on October 4, it has been one of the hottest stocks on the S&P 500. The pessimist within me thinks that the stock should be sold before Mr. Market realizes its error and comes to its senses. The irony is that for a pharmacy that sells products that heals sicknesses, it has not been able to nurse itself back to health and it doesn't appear that this year will be any more prosperous. Although its recent stock performance would lend you to think differently. It should be sold until fundamental reasons for its recent climb are made apparent.
Best Buy (BBY)
Best Buy is in trouble. How's that for stating the obvious? It seems to me that the company has placed its focus more on Amazon's (AMZN) perceived competitive advantage rather than on its own fundamental challenges. I'm probably several weeks late in saying this, but the stock should be sold. Even with its recent declines of 30% since last July, there is still some downside left (in my opinion) below $20.
In a recent article, Fellow Seeking Alpha contributor Rocco Pendola explained exactly why Best Buy's better days are a thing of the past as he offered three compelling reasons. But one of the points that resonated with me was his final thought on the topic, in which he said:
If the RadioShacks (RSH) and Best Buys of the world want to shed their present wretched existences, they'll need management teams ready to circle the wagon with more than memos to the media and howls about price checker apps and sales taxes. Instead, they have to start stepping out in front, not letting the competition dictate the terms of engagement and, once and for all and last but not least, innovating. Until RadioShack, Best Buy or one of their similarly-positioned counterparts show this type of forward-looking pluck, I will not touch their "value" stocks with your smart phone's quick response code scanner.
The sad reality for both Best Buy and RadioShack is that, what Rocco has pointed out above is not likely to happen - which is the reason why I tend to think that the days of both retailers are numbered and will likely suffer the same fate of Circuit City and CompUSA before them.
Grocery store chain Winn Dixie is likely one of the hottest stocks that most investors have never heard of. The stock is up over 50% of the last three months, but unlike Rite Aid, there is clear evidence as to why. The grocery giant recently instituted multi-year plans to upgrade several of its stores, and it appears be gaining traction in that endeavor. It recently reported its Q1 fiscal 2012 results that demonstrated just how focused and effective the company's goals have been.
Winn Dixie delivered a same store sales increase of 3.3% while overall net sales increased 3.1% to $1.6 billion compared to the year ago quarter. Sales growth helped Winn Dixie report a loss of $24 million, significantly less than the $77 million loss in the year ago period. The company has a solid balance sheet that should allow investors some peace of mind over the long term as management continues to transform its stores. However, in the near term, a jump of 50% in valuation is no small change. As the stock is only percentages away from its 52-week high of $10.08, its 200-day average is $7.50 and presents a reasonable (temporary) pullback level.