Three Contrarian Plays for the Months Ahead

Want to invest the contrarian way? Here are three trends some of the top contrarian investors are seeing.
The word “contrary” should be flashing in bright neon lights above the entrance at the Contrary Opinion Forum.
The annual Vermont event attracts some of the top contrarian investors from around the world. Not only are the speakers’ opinions contrary to what’s considered “mainstream,” they also frequently contradict each other.
Some at last week’s conference, the 52nd annual Contrary Opinion Forum, held at Bain Harbor Country Club in Vergennes, Vt., liked the U.S. dollar. Others said no form of paper currency is trustworthy, and that you should be loading up on gold.
Some liked U.S. large caps. Others liked European equities.
And so on. Opinion was decidedly mixed during my two days at the Contrary Opinion Forum.
Still, some overriding themes developed. Here were three major contrarian themes I picked up on from the conference:

  1. China and Japan are prime bounce-back candidates. China and Japan have taken it on the chin in recent years. The Tokyo Stock Exchange is down nearly 2% year to date and is essentially flat over the past 16 months. Chinese stocks have performed even worse. The Shanghai Stock Exchange is down nearly 20% in the last five years.

Several Contrary Opinion Forum presenters believe those downtrends are about to change.
“China will have the best return of any market” in the coming years, asserted veteran investment manager Steve Leuthold of Leuthold Strategies. “It’s selling at half the multiple of U.S. stocks.”
Leuthold has such faith in China that 28% of his firm’s portfolio is invested in China. He is especially weighted in Chinese companies that will benefit from the country’s efforts to clean up its woeful pollution problems. In 2013, 3.5 million people died in China from air pollution. That’s an epidemic that the Chinese government can no longer ignore. In fact, it has become the Chinese government’s No. 1 priority, as the country is investing heavily in nuclear power plants.
Peter Van Dessel, a 27-year alternative investor who recently emigrated from Ireland, also likes China. He noted the average 5% yield in Chinese stocks. Van Dessel likes Japan too, with stocks trading at just 1.2 times book value.

  1. With U.S. stocks, stick to large caps. For more than a year now, U.S. stocks have been deemed “overvalued.” Tony Dwyer disagrees. The Canaccord Genuity equity strategist and frequent CNBC guest insists stocks aren’t as frothy as you might think.

At 19 times earnings, the S&P 500 is “not all that high historically,” Dwyer said. The market has repeatedly proven to be impervious to outside factors such as the fiscal cliff threat, sequestration and the Russia-Ukraine crisis. Dwyer doesn’t see that changing anytime soon. Not as long as corporate earnings continue to grow.
“The equity market is most closely correlated with the direction of earnings,” said Dwyer.
Strong earnings growth is fueling one big factor influencing this ongoing rally: buybacks. With margins high, some of the largest U.S. companies are pouring much of their excess cash into buying back their own stock, thus artificially goosing the share price. That’s why Dwyer likes large caps better than small caps, which he believes will underperform in the years ahead.
The largest companies are the ones that can afford to buy back their own stock. Smaller companies don’t have that luxury.
Dwyer insists a serious pullback is “at least four years away.” Eoin Treacy of is similarly bullish on U.S. stocks, but isn’t so confident that there won’t be a major hiccup along the way.
“We could be here (at a future Contrary Opinion Forum) and the S&P 500 may have reached 10,000,” Treacy said. “The question is, will it go down to 1,600 first?”

  1. Don’t count out biotechs. Small caps weren’t the most popular choice among the Contrary Opinion presenters. Except for small-cap biotechs.

Leuthold explained why his firm devotes 5% of its portfolio to biotechs.
“The big drug companies don’t spend money on research anymore,” Leuthold said. “They spend it on advertising instead. That’s why you see all those Cialis and Viagra commercials on TV.”
Smaller drug companies are the ones devoting their cash to research. As a result, they’re the ones coming up with cures for the various ailments, afflictions and diseases out there. And once they do that, they get bought out by the big boys. And that means a huge payday for subscribers.
Investing in biotechs may sound like a decidedly against-the-grain strategy at the moment, especially in light of Fed chief Janet Yellen’s recent comments calling the entire sector “overbought.” Indeed, it is an against-the-grain strategy. And that was the point of the entire conference.
Contrarian opinions are supposed to go against the norm. Judging by the track records of many of the people voicing those opinions, perhaps investing the unconventional way isn’t such a bad idea.

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