by Louis Basenese, Small Cap and Special Situations Expert
Friday, January 15, 2010: Issue #1176
When salmon swim against the current, they know they’re taking a big risk. They know they’re easy prey for bears. Many get killed.
When investors swim against the current – defying conventional wisdom about a particular stock or sector of the market – they can make a killing.
That, in a nutshell, is the allure of contrarian investing.
The trick, of course, is not to blindly pick any investment that goes against the crowd, but instead to latch onto the contrarian opportunities that everyone hates, but which the fundamentals support. And do so before the rest of Wall Street wises up, too.
So with 2010 still in its infancy, I’ve got three contrarian opportunities for you to consider this year. I’ve tracked each of them closely over the past six months, and now is the time to take action…
Why? Simply put, there’s a definitive shift in sentiment afoot – something that often precedes a big change in price. In other words, this could be your “last call” to ante up on these contrarian trades. So here’s a rundown on each…
Contrarian Investment #1: Everybody Doesn’t Hate the Dollar Anymore
Six months ago, I was a pretty lonely man.
That’s because I was one of the only people suggesting that the U.S. dollar would rebound.
Rather than spell out all the reasons why, check out this pro-dollar article from my colleague, Alexander Green. He’s decided to buck conventional wisdom with me and sums up the argument very neatly here.
And it’s notable that other respected investment gurus have followed suit. Wall Street legends like Byron Wien and Jim Rogers, of all people.
When it comes to Rogers, he revealed he’s recently been buying dollars in recent months in anticipation of a near-term rebound. And a quick glance at the chart below from Bespoke Investment Group indicates that the dollar could be poised for a sustained rally, based on the technicals.
To see the chart in its original size, click here.
In making my pro-dollar argument, I indicated that the prospects for the dollar were strongest against the euro, since currencies trade in relation to each other.
And we can thank Greece’s near-default for opening up everyone else’s eyes to this fact, too.
But there are other fundamentals working against the euro. Namely, the winding down of government stimulus measures in the eurozone.
Once they end, demand will certainly suffer. And it will also draw attention to a key weakness of many European companies: They didn’t cut costs as aggressively as their American counterparts during the recession, so their bounce back to profitability will be subdued.
In addition, a strong earnings season for U.S. companies in relation to their European counterparts should accelerate the dollar’s rise and the euro’s fall.
Contrarian Investment #2: Bye-Bye Shanghai?
Boy, I really got the masses steamed with an article on the China sell-off four months ago.
All I did was suggest the country’s run-away stock market could use a cooling-off period – and gave 10 reasons why that would happen.
Some folks couldn’t bash their keyboards fast enough, with a few even calling for my resignation. Apparently, it was blasphemous to speak a bad word about China in the investment world.
Fast-forward to today and the list of parties taking a cautious stance on China is growing. For example…
- Pimco’s Bill Gross.
- Legendary short-seller Jim Chanos.
- The European Union Chamber of Commerce in China.
- Fang Gang, who heads the National Institute of Economic Research and advises China’s central bank.
- The China Banking Regulatory Commission.
- Stratfor, the global intelligence company referred to as the “Shadow CIA.”
I’ve even seen marketing pieces in the newsletter industry tapping into this change in sentiment.
Not only that, the fundamental evidence continues to mount in favor of a China correction.
For instance, data from the People’s Bank of China shows a 126.5% rise in overdue credit-card accounts. That’s bad news for any economy. But it’s terrible news for China bulls, who are counting on Chinese consumers to keep spending.
Again, the advice here is simple – and two-fold:
- At the very least, tighten up your trailing-stops on any Chinese stocks you own to ensure that you walk away a winner.
- If you can stomach being a contrarian, consider selling short or buying puts on Chinese stocks and ETFs.
Contrarian Investment #3: Stepping on the (Natural) Gas
“Is Natural Gas Down for the Count?”
Headlines like that dominated the newswires a little over a year ago. Some pundits even called for the price to drop to $1 per MMBtu, due to a supply glut.
Yet that’s precisely when I told subscribers to my VIP advisory, The Contrarian Strategist, that, “the cure for low prices will simply be, well, low prices” – and positioned them to profit accordingly.
Sure enough, natural gas prices have rebounded. And what a difference a year makes. I’m now seeing headlines like: “Natural Gas Stocks Could Have a Banner Year in 2010,” pop up everywhere.
Despite the increasing attention, I still think this contrarian trade has legs – especially with much of America enduring a brutal cold spell. Heck, snow is even falling in the southeast. And one Miami man died from hypothermia.
The longer this lasts – or the more frequently it occurs – the greater the chance that the natural gas supply glut will disappear and prices will rise. The low temperatures could also stymie or shut off production in Texas, Louisiana and Oklahoma.
Tack on natural gas’s emerging role as a “bridge fuel” to a greener and cleaner world, and many producers could enjoy a banner year, bringing their companies’ shares along for the ride.
If you want broad exposure, consider the First Trust Revere Natural Gas ETF (NYSE: FCG). It invests equal amounts in publicly traded U.S. companies that derive a minimum of 50% of their revenues from natural gas.
The fund uses a common-sense approach to make the selections. It scores each stock based on valuation (price-to-earnings and price-to-book ratios), profitability (return-on-equity) and correlation to natural gas prices. Only the top 30 make the cut. It rebalances the portfolio each quarter and has a modest expense ratio of 0.6%. But don’t delay.