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Who isn't a contrarian or a value investor today? In the wake of past asset bubbles, many of today's investors describe themselves as contrarians. Can a majority of investors really have minority views? How can a consensus be identified when everyone claims to be different?

Even though Jim Cramer's trades are not long-term recommendations, his picks can be a very useful barometer of investor and media attitudes. Contrarians can use his picks as an indicator of current market sentiment to selectively counter.

Of Cramer's 99 buy and sell stock opinions recently issued on CNBC's Mad Money (2.27.2012 to 3.2.2012), three sell calls and four buy calls can be challenged on a valuation basis. Kinder Morgan Energy Partners (NYSE:KMP), Check Point Software Technologies (NASDAQ:CHKP), Beam, Inc. (NYSE:BEAM), and Boardwalk Pipeline Partners (NYSE:BWP) are too richly valued to be buy picks. Conversely, HollyFrontier Corporation (NYSE:HFC), Tech Data Corp. (NASDAQ:TECD), and Hewlett-Packard (NYSE:HPQ) are too cheaply valued to be sell picks.

These picks are summarized below:

Ticker

Cramer's Call

Airdate

P/E

P/B

P/S

KMP

Buy

2.27.2012

355.8

4.0

3.6

HFC

Sell

2.27.2012

6.4

1.4

0.6

CHKP

Buy

2.28.2012

48.5

3.9

25.3

TECD

Sell

2.28.2012

10.7

1.1

0.1

HPQ

Sell

2.29.2012

9.0

1.3

0.4

BEAM

Buy

3.02.2012

61.9

2.1

3.7

BWP

Buy

3.02.2012

28.4

1.7

5.0

After reviewing the price multiples of KMP, CHKP, BEAM, and BWP it is clear that these stocks are richly valued according to static valuation metrics.

Sadly, even pleasant future growth scenarios are not much consolation for such richly valued stocks. What could an investor expect from these picks?

Total returns were calculated over a three year holding period for each of these stocks. (I use a 3-year holding period since above-average growth estimates are not reliable further out.) Giving these buy recommendations the benefit of the doubt, each stock is assumed to be sold at a generous growth stock price-to-earnings multiple of 17 and the maximum of historical and analyst estimate values for earnings growth are assumed. These assumptions are used to project an annualized total return over the next three years and a terminal price to earnings ratios, that is, price paid today divided by earnings at the end of the holding period for each stock:

3 Years Growth

Ticker

Cramer

g (past)

g (future)

Terminal P/E

Annualized Return

KMP

Buy

-34.6%

7.9%

283.5

-60.2%

CHKP

Buy

19.7%

11.2%

28.3

-15.7%

BEAM

Buy

-30.2%

10.1%

46.4

-28.1%

BWP

Buy

-12.4%

3.1%

25.9

-10.9%

Even after incorporating fantastic earnings growth, these stocks are just too expensive.

Alternatively, HFC, TECD, and HPQ were discovered as contrarian buy picks with attractive valuations by sifting through the week's sell recommendations. These contrarian buy candidates were evaluated using conservative assumptions. A bargain value stock price to earnings multiple of 10 and the lesser of historical and analyst estimates values for earnings growth are assumed. These assumptions are used to project an annualized total return over the next three years and a terminal price to earnings ratio, that is, price paid today divided by earnings at the end of the holding period for each stock:

3 Years Growth

Ticker

Cramer

g (past)

g (future)

Terminal P/E

Annualized Return

HFC

Sell

-5.7%

23.2%

7.6

9.9%

TECD

Sell

61.8%

10.3%

8.0

7.9%

HPQ

Sell

8.9%

5.5%

7.6

10.1%

The attractive valuations of HFC, TECD and HPQ protect investors from tough scenarios like these, providing them with positive returns.

These projected returns flip the script on these seven stock calls. They ignore stories and current sentiment while using valuation and math to demonstrate how buying expensive stocks can cost investors dearly.

Bear in mind that challenging the consensus requires guts of steel. Contrarians have to shut out the allure of stories, interviews in the financial media, and other distractions in order to focus on valuation. This is quite difficult.

Read the article disclaimer.

Source: 7 Valuation-Based Contrarian Picks