World's Most Contrarian Investment

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Contrarian Investment Opportunities

How do you identify great contrarian investment opportunities?

Two ways. First, rather than limiting yourself to your national borders, you seek out opportunities worldwide. Next, you insist on two essential factors: abject pessimism and extreme valuations. That’s exactly what we have in European stocks today.

Ask your friends and neighbors which stocks in Europe they’re buying right now and they’ll ask you to sit down so they can feel your forehead. After all, no one in his right mind would buy stocks in a region where socialist policies reign, economic growth is almost nonexistent and the currency – the euro – is coming apart at the seams, right?

Wrong. The fact that almost no one is enthusiastic about Europe right now – indeed, most see it as a ticking time bomb – tells you that sentiment is entirely negative.

How about valuations? Those are compelling, too. The benchmark MSCI Europe Index, for example, currently sells for just 9.8 times estimated 2012 earnings, versus an average of 17 times earnings over the past 25 years. Plus, the drop in prices has boosted the dividends on many of the well-known global companies based in Europe.

Lower Values, Higher Dividends…

In sum, you have low valuations, high dividends and extremely negative sentiment. Yet the vast majority of investors reading these words won’t plunk a dime in these markets. (And, if history is any guide, a year or two from now they’ll scratch their heads and say they just can’t fathom how European stocks could have rallied so strongly.)

Not that buying contrarian investments in this troubled region doesn't present some risks. After all, the European Central Bank (ECB) is propping up troubled banks. Many Eurozone countries are teetering on the brink of recession. And there’s a decided lack of bold political leadership in the region.

But the good news is that all these factors are already well known and fully priced into European stocks. (That’s why they’re so darn cheap.) Meanwhile, the U.S. economy has stabilized – reducing a big risk to the global economy – and the ECB has at least addressed liquidity problems at the banks.

Plus, a weaker euro is actually boosting the earnings prospects for the many companies that export to other parts of the world where economic growth (and currencies) are stronger.

Prime examples are:

  • Siemens AG (NYSE: SI),
  • Nestle (Pink: NSRGY),
  • Novartis (NYSE: NVS), and

So how do you play this contrarian investment opportunity? One of the best ways is with a low-cost, Europe-focused ETF like the Vanguard MSCI Europe Fund (NYSE: VGK). It’s easily the least expensive ETF in the sector with annual expenses of just .14%.

Companies in the U.K. account for around 34% of VGK’s assets, while France, Germany and Switzerland make up approximately 40%. The fund holds more than 450 stocks, but a quarter of its $2.4-billion portfolio is in its top 10 holdings, which include Vodafone, Royal Dutch Shell and HSBC Holdings. You’ll earn a 4.4% dividend here.

If you want to benefit even more from a potential slingshot recovery in these markets, try the WisdomTree Europe SmallCap Dividend Fund (NYSE: DFE). It keeps a third of its assets in smaller British companies and the rest in small-cap stocks in the Eurozone.

Remember, when an equity market rallies, the small-cap issues generally outperform larger stocks. And your contrarian investment will get a whopping 5.8% dividend here.

So there you have it, two great ways to play one of the most compelling opportunities in the world right now. Of course, most investors simply cannot bring themselves to invest against the herd. That’s how they got stuck in internet stocks a decade ago and residential real estate five years ago.

It’s also why this is perhaps one of the best contrarian investment opportunities today.

Good Investing,

Alexander Green

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Another Great Contrarian Candidate

In today’s issue, Alexander Green talks about how European companies could be an interesting contrarian play given the negative sentiment surrounding the region.

But Alex has also made it widely known that he thinks another area is an intriguing contrarian bargain because of negative news and sentiment – Japan.

That’s why Alex recommended Toyota (NYSE: TM) in the most recent issue of The Oxford Club’s Communiqué.  In just a couple of weeks since Alex made the call, Toyota has already rallied almost 10%.

Here’s why Alex feels Toyota is due for a major rebound in 2012:

“From nearly $100 a share a year ago, shares of Toyota tumbled more than 30% and hit a 15-year low in the fourth quarter…

“Until last year’s natural disaster in Japan, Toyota was the world’s top-selling automaker. (It trailed General Motors and Volkswagen last year.) But now the company is poised to resume its dominance.

“Consider, for example:

  • Toyota’s global car production has just come fully back up to speed.
  • Management expects sales to surge 20% this year and hit a new all-time record – 8.48 million vehicles.
  • Demand in emerging markets is skyrocketing. Toyota forecasts that revenue in China and other developing countries will make up 45% of its worldwide sales this year, compared with 33% five years ago.
  • The introduction of several new models – from a redesigned Lexus LS sedan to a new Prius compact hybrid – are likely to further goose sales.
  • The now overvalued yen is likely to tumble in coming months, boosting revenue and profit margins higher still.

“The longer-term outlook is even more positive…

In 2011, Toyota earned roughly $3 a share. This year, those earnings will triple. And the stock? I expect it will not only surge in 2012, but make a strong multi-year run.

“In short, this is a conservative stock with big upside potential. You should add it to your portfolio today.”

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