Being contrarian can be very lucrative

[bowman]

How on the nose was PBG several months ago? I for one thought management were behaving very badly and stayed away.

Only missed a seven bagger and it looks like it's not done yet.

 

[robusta]

Is now the time to be looking in the Real Estate Sector?

I have recently picked up Finbar Group at a significant discount to my calculations of it's intrinsic value.

In The Financial Review today Trevor Hoey has highlighted Cedar Woods Properties and Diploma Group in his article Hidden gems to be found beyond the main players.

A couple of months ago in the doom and gloom JBH and Oroton were standout value in Consumer Dicretionary sector.

I would be interested to hear your thoughts on undervalued companies or sectors.

 

[robusta]

OK I guess by definition a contrarian thread will never be popular. I thought I might list a couple of investments I have made that might generate some interest. I understand it is a fine line between value investing and contrarian investing but here goes:
FGE Forge Group. OK these guys are the flavour of the month but when shares purchased from mid- April to late May we were in the middle of mining tax, soverign debt and talk of asset bubbles in China.
Average price paid $2.582
Price Today $3.71
Paper Profit 43.7%
Dividend to be paid $0.05

JBH JB HiFI. JBH also look good but when purchased mid June things were not looking good (read above minus mining tax)
Average price paid $18.636
Price Today $21.81
Paper Profit 17%
Dividend received 0.33

FRI Finbar Group. To quote Comsec Market Bulletin regarding sharemarket sectors " Real Estate - Investors are not ready to embrace commercial property " All other sectors except IT are rated index weight or over weight.
Purchased early this month
Average price paid $1.061
Price Today $1.025
Paper Loss -3.4% I hope it gets cheaper so I can buy some more.

 

[ParleVouFrancois]

Hey robusta, a somewhat personal question here and a bit off topic, but are you a fan of Roger Montgomery? I swear you two have the same picks, you even talk similarly. You might even be Roger, who knows! Anyway, I'm a big fan of his style of investing as well, high returns on equity etc, though I think it's a bit 'stiff', as in he plays by his rules and never really bends them to go for the smaller caps etc, but obviously that's working for him and he's probably quite wealthy now .

Anyway, for my "contrarian" pick I'm long GDO, or gold one international, a gold producing company based in South Africa, market cap of 200 million, producing about 80,000 ounces of gold a year, and cash costs of 300-400 per ounce. Excellent value. I'm not sure if that makes it "contrarian" as gold is a pretty popular theme against the backdrop of the "GFC Mark II", however it hasn't had much of a run up compared to it's peers, and the 200 market cap should be more like 500 million imo, due to the production rate and cost of production. So I'd call it a contrarian pick in the gold sector, due to it's underperformance when compared to it's gold producing peers, such as RMS.

DYOR etc etc.

 

[robusta]

Ok you got me ParleyVouFrancois I am a big fan of Roger Montgomery and yes I follow a lot of his stock picks however I am very happy to go for smaller caps ONT is a example that I hold.
Good luck with GDO however I am not sure how to value it as I don't know where the gold price is going. (maybe I am Rogers ventriliquist doll). Got burnt holding ERA personally I would rather hold mining services than the miners themselves.
The only problem I have had trying to follow Roger Montgomerys investment style is learning patience and waiting for the price to be a decent discount to intrinsic value.

 

[explod]

Being contrarian is just that and it is gambling.

Fundamentals and technicals have their place but the real deal is trend following. ie. the hottest thing (commodities, financials, materials, real estate, etc etc in its turn and in its time) to back it the hottest sector and then the stock with the best background on all points and its trend.

One of the most valuable books I ever read for investment was, "Trend Following" by Michael Covel. I think it was published about 05, my copy is as usual on loan.

The big issue is sentiment. It is why the world markets and our All Ords follow the Dow like a little puppy wagging its tail. Think about it, sentiment drives the herd, half the kids that followed the beatles did so because that was the thing amongst the peer group. Observed the frenzie of it first hand.

Go figure, but that's it and has rewarded me well since I got on board. "The trend is your friend untill the bend".

The idea that there is easy and fast money is a pipe dream, steady as she goes on a solid company in a solid trend.

In my very humble opinion of course.

 

[robusta]

Being contrarian is just that and it is gambling.

Fundamentals and technicals have their place but the real deal is trend following. ie. the hottest thing (commodities, financials, materials, real estate, etc etc in its turn and in its time) to back it the hottest sector and then the stock with the best background on all points and its trend.

One of the most valuable books I ever read for investment was, "Trend Following" by Michael Covel. I think it was published about 05, my copy is as usual on loan.

The big issue is sentiment. It is why the world markets and our All Ords follow the Dow like a little puppy wagging its tail. Think about it, sentiment drives the herd, half the kids that followed the beatles did so because that was the thing amongst the peer group. Observed the frenzie of it first hand.

Go figure, but that's it and has rewarded me well since I got on board. "The trend is your friend untill the bend".

The idea that there is easy and fast money is a pipe dream, steady as she goes on a solid company in a solid trend.

In my very humble opinion of course.

Guess I am very firmly in the Fundamentals camp it just seems logical to me. I notice you look for solid company in a solid trend how to you define / find solid companies?
With trend investing how do you detect over valued companies, sectors and / or markets ? eg ABC Learning, Dot Com bubble.
Not advocating easy or fast money I have been very lucky with FGE but I also had to have patience and confidence in the intrinsic value as I started buying @$2.95 and kept on buying all the way down to $2.38. FRI may take years to record large gains but I will be happy to hold as I like the fundamentals.

 

[suhm]

With forge if you bought it at 30-50c i'd agree you were being contrarian, but above $2 it was in a huge uptrend already my .

 

[robusta]

Could not disagree more. The companies I have invested in are quality companies. They all share high ROE, little or no debt and were purchased a dicount to intrinsic value.
I got lucky with FGE and JBH as the market realised how undervalued they were and the sp has increased quickly giving a large paper profit in a short period of time. As for FRI I don't care about the sp as I believe over time it will have to rise to reflect intrinsic value and rising profits, may take 2 months, may take 2 years while I am waiting I will be happy to take dividends and keep looking for more out of fashion contrarian quality companies.

 

[explod]

As you are probably aware I follow the gold up trend. That to me is one of the strongest sectors as it has gone up on average more than 17% every year since 2001. The GFC caused all stocks to fall, gold stocks included. The GFC also highlighted some of the fundamental problems with currencies and reinforced to me why the gold price would continue to rise.

I could give you countless examples but OGC jumps to mind as a very good one, I also liked it as being a NZ mine it has no soveriegn risk. OGC was beaten down to 25 cents but when it returned to 50 cents anyone could see the trend was back on. What a great trade for holders. I sold mine at $1.10 to something I felt better (but that's life.) However to make these sorts of decisions you need to go to the books (like the one I mentioned) and plan a strategy around, good fundamentals, the right sectors and the right entry exits and reasons for staying with trends.

 

[robusta]

With forge if you bought it at 30-50c i'd agree you were being contrarian, but above $2 it was in a huge uptrend already my .

Maybe you are right I don't really look at trends all I know is when I started buying the sp was heading down maybe if I was more patient I could have bought at a cheaper average price.
There are similarities between value and contrarian investing (maybe they are the same thing different name) and it would not surprise me if you could achieve the same results with trend investing.

 

[So_Cynical]

WD robusta...you caught a nice bottom with JBH for sure, Forge i don't watch so i wont comment, Finbar well im a big fan of the real estate stocks at the moment - trend following V value buying V bottom buying it can often mean all 3 trading the same stock for different reasons at different times with different objectives.

Its all about what we are comfortable with...i could never trend follow :crap: i get a shiver down my spine even thinking about it.

However to make these sorts of decisions you need to go to the books (like the one I mentioned) and plan a strategy around, good fundamentals, the right sectors and the right entry exits and reasons for staying with trends.

Mate i brought TRY at 0.77 and MDL at 0.38 and i didn't need to read a book on trend following to make that decision and i certainly didn't buy them because they were trending up...i brought the bottoms.

There are similarities between value and contrarian investing (maybe they are the same thing different name) and it would not surprise me if you could achieve the same results with trend investing.

Most Trendy s buy the trend...not the stock, its all about the price action.

 

[Julia]

Being contrarian is just that and it is gambling.

Fundamentals and technicals have their place but the real deal is trend following. ie. the hottest thing (commodities, financials, materials, real estate, etc etc in its turn and in its time) to back it the hottest sector and then the stock with the best background on all points and its trend.

One of the most valuable books I ever read for investment was, "Trend Following" by Michael Covel. I think it was published about 05, my copy is as usual on loan.

The big issue is sentiment. It is why the world markets and our All Ords follow the Dow like a little puppy wagging its tail. Think about it, sentiment drives the herd, half the kids that followed the beatles did so because that was the thing amongst the peer group. Observed the frenzie of it first hand.

Go figure, but that's it and has rewarded me well since I got on board. "The trend is your friend untill the bend".

The idea that there is easy and fast money is a pipe dream, steady as she goes on a solid company in a solid trend.

I absolutely agree, explod. You can buy the greatest company ever, with the best fundamentals but if market sentiment isn't with you, the SP is not going to rise and you are simply not going to see any capital growth.

trend following V value buying V bottom buying it can often mean all 3 trading the same stock for different reasons at different times with different objectives.

Yes, you would often be right about that.

Its all about what we are comfortable with...i could never trend follow :crap: i get a shiver down my spine even thinking about it.

Ah, So Cynical, here we go on the same merry go round again.
I likewise get shivers down my spine thinking about holding a stock bought just on fundamentals, trying to persuade myself that the dividends and franking are enough to offset the falling share price.

Good that we can all be comfortable with what suits us best.

Most Trendy s buy the trend...not the stock, its all about the price action.

Well yes, but nonetheless I wouldn't be buying just the trend without checking such things as debt levels, company background, directors, history of EPS, DPS etc. In other words, always am sure to buy a solid company but one which has an uptrending SP.

 

[robusta]

Julia I respect a lot of your opinions do you really think market sentiment is a permanent thing?
If you can buy the best company ever with the greatest fundamentals when sentiment is against it surely you are going to buy at a great price and sooner or later the market can no longer ignore the great returns the company will be giving its shareholders and sentiment will change.

 

[suhm]

The problem if there is no catalyst for the market to bridge the gap between what you think the intrinsic value is and the current market price there is no reason why the stock will not continue to trade at that discount. But in the interim there is a huge opportunity cost associated with holding the stock if it just goes sideways and even more so if it goes down.

 

[So_Cynical]

The problem if there is no catalyst for the market to bridge the gap between what you think the intrinsic value is and the current market price there is no reason why the stock will not continue to trade at that discount. But in the interim there is a huge opportunity cost associated with holding the stock if it just goes sideways and even more so if it goes down.

Its the time frame...show me a 1 year chart of a stock not rising (continuing to trade at a discount) you cant, and that's because there's always someone buying/selling, there's always someone like me that looks at XYZ and thinks Dude! XYZ has 250 million in cash, no debt, making 3 million a week in profit from a plant with a 1 billion dollar replacement value, and a market cap of 800 mill....im buying!

 

[Julia]

Julia I respect a lot of your opinions do you really think market sentiment is a permanent thing?
If you can buy the best company ever with the greatest fundamentals when sentiment is against it surely you are going to buy at a great price and sooner or later the market can no longer ignore the great returns the company will be giving its shareholders and sentiment will change.

Robusta, I understand the principle, but for me it's about having my capital working to best effect all the time. So if funds are tied up in a stock that's falling or trading sideways, I'm just not comfortable with that when there are usually some stocks around that are doing better. It's about opportunity cost as Suhm describes below.

Or sometimes I just prefer to stand aside, especially when cash rates are OK.
Probably also has to do with one's age and whether or not you're generating all your income from your capital, as distinct from investing on the side when you have a full time job. My first priority is to preserve my capital and existing profits.

The problem if there is no catalyst for the market to bridge the gap between what you think the intrinsic value is and the current market price there is no reason why the stock will not continue to trade at that discount. But in the interim there is a huge opportunity cost associated with holding the stock if it just goes sideways and even more so if it goes down.

 

[basilio]

I see a large part of the problem as organizations and markets which make money from share trading rather than the companies that are represented by the shares.

The theory of the stock market is that companies float with a prospectus, investors buy shares based on the story and the quality of the management. Again in theory the company proves commercially successful - or fails- and the result is reflected in the SP and/or dividends.

The reality ? I think the stock market resembles a giant casino with hundreds of mini games. Many are bent and almost all with the house taking it's cut.

In this reality the stock brokers and stock markets are forever wooing punters to buy shares because

1) They get commissions on sales
2) They are selling shares for companies and get commissions on successful placements
3) The owners of the stack market get wealthy on the turnover.

It doesn't actually matter a hill of beans what gets sold , or how worthwhile it is. Every sale rings a commission regardless of the quality of the stock. That should make one think.

Again in this reality if someone can just tell a good enough story to get enough people to believe a stock will be a winner that belief alone will encourage enough people to jump in and create the price rise that will give the quick buck. We call this ramping don't we ? Or it could be market sentiment.

And sitting in the middle of all this are the people who establish companies with a pitch and a prospectus, give themselves millions of shares for their efforts and then turn these paper assets into real dollars if they can convince enough punters to jump in.

All of this will make big, quick bucks. You would have to be a right mug to pass the easy money for the hard uncertain work of actually building a profitable business when it could be so much easier to play this game.

And this is the cornerstone of our economic system and our financial security.

way too late. Lets pack this in...:

 

[Bushman]

I see a large part of the problem as organizations and markets which make money from share trading rather than the companies that are represented by the shares.

The theory of the stock market is that companies float with a prospectus, investors buy shares based on the story and the quality of the management. Again in theory the company proves commercially successful - or fails- and the result is reflected in the SP and/or dividends.

The reality ? I think the stock market resembles a giant casino with hundreds of mini games. Many are bent and almost all with the house taking it's cut.

In this reality the stock brokers and stock markets are forever wooing punters to buy shares because

1) They get commissions on sales
2) They are selling shares for companies and get commissions on successful placements
3) The owners of the stack market get wealthy on the turnover.

It doesn't actually matter a hill of beans what gets sold , or how worthwhile it is. Every sale rings a commission regardless of the quality of the stock. That should make one think.

Again in this reality if someone can just tell a good enough story to get enough people to believe a stock will be a winner that belief alone will encourage enough people to jump in and create the price rise that will give the quick buck. We call this ramping don't we ? Or it could be market sentiment.

And sitting in the middle of all this are the people who establish companies with a pitch and a prospectus, give themselves millions of shares for their efforts and then turn these paper assets into real dollars if they can convince enough punters to jump in.

All of this will make big, quick bucks. You would have to be a right mug to pass the easy money for the hard uncertain work of actually building a profitable business when it could be so much easier to play this game.

And this is the cornerstone of our economic system and our financial security.

way too late. Lets pack this in...:

I take it you do not own shares then?

For all these sentiment investors, remember that an asset value is simply the present value of its future cashflows, discounted at rate of return that compensates you, the shareholder, appropriately for the risk you are taking on.

It is actually quite simple and contrarian plays for fundamentally sound companies will always deliver a profit in the longer run. This is how you make money in the sharemarket and everyone on this forum should be aiming to take advantage of undervalued shares. That is what share market participants do.

If you lose money in the share market, you have stuffed up the cash flow forecasts or paid too much for the risk assumed. Simple as that.

Get a grip guys. You are prima facie examples of why retail investors lose money in the sharemarket - buy at the wrong time, sell at the wrong time, capitulate at the wrong time, take bad advice etc. Its all emotion, no reason.

Robusta - good call re commercial outside the top 10 REITs (which are at fair value now). The Australian commercial property market has sailed through the GFC when compared to past downturns. This is due to the strength of the Australian economy. Valuations, a lagging indicator, will start the reflect this improved outlook. Watch out for refinancing pressures though as the banks are still playing hard ball with the train wrecks.

 

[skyQuake]

Its the time frame...show me a 1 year chart of a stock not rising (continuing to trade at a discount) you cant, and that's because there's always someone buying/selling, there's always someone like me that looks at XYZ and thinks Dude! XYZ has 250 million in cash, no debt, making 3 million a week in profit from a plant with a 1 billion dollar replacement value, and a market cap of 800 mill....im buying!

Any of the LICs