A recent article in US News and World
Report looked at eight potentially profitable
contrarian investments. That got us to
When do contrarian investments work and
when are they just value traps?
In a recent article we asked, are there any
cheap investments left? In it we visited the
same issue from a slightly different
viewpoint. Here are the contrarian
investments suggested Bank of America and
reported by US News and a few thoughts
about each one as well as contrarian
investing in general.
Contrarian Investments to Check Out
In their article, US News writes about stocks
that are “due to bounce.” They offer stocks
that are down at least 35% year on year.
They consider why the stock is down and
why they believe it will recover and grow
even more than before. Here they are:
CBS has spent heavily on content which has
reduced its bottom line. It also just merged
with Viacom. As we noted in our article
about Disney, content is increasingly
important. As such the investment in more
content can be viewed as solid planning for
And the Viacom merger can be seen as
another positive strategic move. As such,
the folks at Bank of America and US News
are offering a target price of $63 for this
stock that currently goes for $38.
The problem is that this is a very competitive
environment with more and more people
getting their entertainment and news online
instead via the TV set. The question is if
CBS can prosper in a world dominated by
Disney Plus and Netflix.
This is a large fertilizer company that is a
leader in production of potash and
phosphates. Its stock is down more than
40% from a year ago. We don’t see this
stock so much as a contrarian bet but as a
cyclical stock whose value goes up and
down with the needs of agricultural
This last year has been terrible for US
agriculture with too much rain, too much
heat, and being cut off from markets for
soybeans, especially, in China. As
conditions improve, they will be selling more
fertilizer and making more money.
The issue is that they are not a long term
growth prospect as the stock started 1994 at
$20 a share and that is what it sells for today
despite being as high as $150 very briefly in
When Do Contrarian Investments Work?
Back in the last 1980s Warren Buffett lots of
Coca Cola stock when it was a contrarian
bet. His investment, like all of them, was
based on an assessment of intrinsic stock
His Coca Cola investment turned out
exceptionally well because the company has
grown even more and not turned into a
value trap. Our concerns about both of the
investments we mention here, as well as
others mentioned in the article, are generally
reduced in price for good reasons and do
not have a clear path to long term prosperity
in excess of what they have demonstrated
over the years.
In short, when contrarian investments work
is when they have the prospect of strong
long term earnings.
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