6 Contrarian Picks For Big Profits In 2012

by: Efsinvestment

2011 has been a roller-coaster for the equity markets. The first quarter was a good one, where world markets made significant gains. Everything was fine... Until May... Something happened in Europe, and the panic created a sell-off in the equities. The markets recovered in late June, but this time, more bad news followed more bad news, and the stocks were subject to massive losses. S&P 500 (SPY) dropped by near 25% in the third quarter. The fourth quarter has been a good one so far. Most stocks bounced back to their January levels.

In this volatile market, many stocks performed remarkably well. Examples include Apple (AAPL), which returned 26%, and McDonald's (MCD), which returned 35% in this year. On the other hand, some of the stocks were subject to huge losses. The biggest losers came from the financial sector. This sector lost near 20% on average. Financials were followed by basic materials (-12%), and industrial goods (-6%). Contrarian investors might consider some of these hard-beaten stocks for their portfolio in 2012. If things work well in 2012, these stocks might bring huge profits to shareholders. A diversified portfolio of these stocks might fit perfectly to the speculative portion of anyone's portfolio. I have examined these stocks from a fundamental perspective, adding my O-Metrix Grading System, where applicable. Here is a brief analysis of 6 contrarian picks to consider for big profits in 2012:

Stock Name

O-Metrix Score

P/E Ratio

YTD Return

My Take

Bank of America




Risky Buy






Research in Motion




Risky Buy






Hecla Mining




Risky Buy





Risky Buy

Data from Finviz/Morningstar, and is current as of December 28. You can download O-Metrix calculator, here.

Bank of America (BAC) has been one of the biggest losers of 2011. The stock lost near 60% of its market cap and is trading almost 65% below its 52-week high. At the beginning of the year, I was extremely bearish on Bank of America, as it had the most extravagant balance sheet among its peers.

Bank of America still has $70.8 billion of goodwill and $16.8 billion of intangible assets in its portfolio. Subtracting these from the company's total equity value of $230 billion gives us $142 billion of net tangible assets. As of December 28, Bank of America has a market cap of $55.6 billion. Thus, it is trading at only 0.39 times the tangible book value. The double-dip recession risks and litigation risks could be a major headache for the shareholders. However, I do not think the current economic conditions suggest signs of double-dip recession.

Litigation issues does not justify a market cap loss of above $70 billion. Warren Buffett also agrees that Bank of America offers a compelling valuation that he invested $5 billion in the company. The stock offers a low-risk/high-reward profile at the current prices. It looks like $5 is a strong support level for Bank of America. Therefore, I rate it as a risky buy.

Ford (F) was able to nearly double its earnings in this year, but the stock has been heading south for a while. Ford stock lost near 36% of its market cap and is trading almost 44% below its 52-week high.

Ford has an attractive valuation at a trailing P/E ratio of 6.51, and forward P/E ratio of 6.80. Analysts estimate 7% EPS growth over the next 5 years, which is pretty reasonable, considering the 14% annualized EPS growth in the past 5 years. Insiders are pretty bullish about Ford Motor Company. Ford William Clay Junior is acquiring Ford shares at bulks of 25,000 shares.

I think Ford is a great company, which has significant presence around the world. It is also trading at a significant discount compared to Toyota Motor (TM). Therefore, I rate Ford as a contrarian buy for 2012.

Research in Motion (RIMM) was subject to creative destruction by its competitors. In 2011, RIMM lost near 75% of its market cap and is trading almost 80% below its 52-week high.

It might be claimed that Apple's rise led to RIMM's fall. However, I think it will be unfair to blame Apple or Google (GOOG) for all of the losses experienced by the RIMM's shareholders. As Robert Wernstein suggests,

RIM investors were hit from every angle. Product delays, management over promising and under delivering, management mis-reading the market, product write downs due to an inability to sell what they did have, a large service outage, and staff issues made for a lot of sleepless nights for owners of RIM stock.

From a fundamental perspective, it is hard to believe that the stock is trading at such valuations. RIMM as a debt-free company that is trading at only 3.5 time the trailing earnings and 5 times the forward earnings. It is also priced well-below the book value. There are rumors around, claiming that RIMM could be a take-over target by tech giants. I think this is a real possibility which might happen in this year. Therefore, I rate RIMM as a risky buy for 2012.

Alcoa (AA) is one of the leading aluminum producers in the world. Founded in 1888, the company operates in four segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. Aluminum prices fell by almost 45% this year which explains the losses experienced by the Alcoa shareholders. Following the trend in aluminum prices, the stock lost near 42% of its market cap and is trading almost 54% below its 52-week high.

While Alcoa was doing admirably good until November of this year, things have reversed since then. Things might look pretty bad for the moment, but the company has nice long-term agreements in the overseas. If the stock can keep its forward P/E under 9, this will lead to an over 40% discount to its 5-year average.

Alcoa is a good investment to play the demand recovery for aluminum. The technical patterns also suggest that the stock has bottomed. Therefore, I rate Alcoa as a contrarian buy for big profits in 2012.

Hecla Mining (HL) is one of the oldest mining companies in North America. Established in 1891, Hecla is primarily involved in the discovery, production, and marketing of basic materials such as silver, gold, lead, and zinc.

At the middle of the year, when the stock was trading above $8, I was bearish on Hecla mining, and suggested avoiding the stock. The extremely high P/E ratio of 62 were not justified by any valuation metric. Since then, the company increased its quarterly earnings by 200% over the last quarter. But the stock lost near 52% of its market cap in 2011 and is trading almost 56% below its 52-week high.

I am not a fan of commodities or commodity stocks. However, Hecla seems like a good deal, which is trading at a trailing P/E ratio of 13.5, and P/FCF ratio of 8.38. The balance sheet is debt-free, and the company has $1.5 of cash per share. It looks like the stock has multiple-bottomed and is primed for a rebound in 2012.

Transocean (RIG) has been one of worst performing energy companies in 2011. The stock lost near 42% of its market cap and is trading almost 53% below its 52-week high. It offers a great yield of 8%, which is primarily due to the cut in the share prices.

Transocean was deeply affected from the Gulf of Mexico spillover. As suggested here by a fellow SA contributor, Transocean was responsible for "conducting safe operations and for protecting personnel onboard as owner of the rig". Brazilian government also filed a $10 billion lawsuit against Chevron (CVX) and Transocean for their role in the recent oil spill.

Apparently, these issues will keep the stock depressed and investors confused for a while. However, the stock is trading at 0.6 times the book value. It is also trading near half the analyst target price of $62.5. Barclays has a target price of $72. Therefore, I rate Transocean as a risky buy for 2012.

Disclosure: I am long AAPL.