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All Contents © 2017The Kiplinger Washington Editors
By Aaron Levitt
| January 2017
Following the herd can make you money. After all, there’s nothing wrong with finding the
latest momentum play and riding it for big gains. The difficult part is knowing when to jump off before
the train derails.
But the real secret to building wealth? Going in the opposition direction. Some of the best stocks to
buy are those that no one wants … yet.
The old adage is to buy when there’s blood in the streets, which is just a dramatic way of saying to
buy beaten-down stocks that have turned into deep values. Thus, they’re “contrarian” plays — you think
they’re going up when everyone thinks they’re going to keep going down.
It takes some gumption, but if you’re willing to go against the grain and ride things out until the
tides turn, it can result in some boffo gains.
As a note: Not every beaten-down stock is going to come back. Just about every publicly traded company
that has filed for bankruptcy protection is proof of that. So … how do we leave the chaff behind and get
into the good wheat?
We’ve dug into some not-so-hot stocks to deliver 10 of the best contrarian stocks to buy in the new
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Riku Lu Via Flickr
Despite all the Star Wars mania you could want, Walt Disney Co. (DIS) has been hurting
over the last year.
The culprit: ESPN.
The ubiquitous sports network was once a huge cash cow for the media giant. But as other sports outlets
have cropped up recent years — and as consumers increasingly cut the cord — Disney and its lucrative ESPN
revenues have started to falter. Disney stock is flat over the past year versus a double-digit performance
for the S&P 500 as a result.
But DIS could be one of the best stocks to buy for 2017.
ESPN has been weighing down a company that’s firing on so many other cylinders. Not only is Rogue
One a monster hit in its own right — grossing more than $600 million so far — but its rampant success
should translate into a record-breaking performance for Episode VIII out this year. Meanwhile, Disney has
plenty of other Star Wars and Marvel offerings coming down the pike this year. Also, theme park attendance
is rising, and consumer products continues to perform well.
It’s just ESPN … and that’s becoming less of a problem each day.
Disney’s a well-loved company, but the stock has fallen out of favor. That won’t be the case by the end
Dhaluza via Wikimedia (Modified)
Everyone knows how the collapse in crude oil affected energy stocks like Exxon Mobil Corporation (XOM) and Kinder Morgan
But the effects were far more widespread, impacting almost everything that even touched oil — including
not-so-obvious victims such as Trinity Industries Inc. (TRN).
Even if you haven’t heard of TRN, odds are that every driller in the Bakken or Eagle Ford has. Trinity
is one of the world’s largest producers of railroad cars — especially tanker cars. With no pipeline
infrastructure in these areas, energy producers had to use tanker cars and crude-by-rail operations to
ship their product to market. Orders at TRN (and its share price) surged during the boom.
Then the bottom fell out.
Still, the recovery is underway, and for several other reasons, Trinity could be one of the best
comeback stocks to buy for the new year. best contrarian stocks to buy.
First, President-elect Donald Trump loves fossil fuels. Trinity makes tank cars and coal hoppers, so it
could get a major boost as Trump’s policies kick the sector into high gear. Secondly, rising oil prices
have more people drilling. And crude-by-rail is still one of the easiest ways to get oil out the major
TRN shares trade roughly 50% below their boom peak, so there’s still all sorts of room for gains in
this contrarian play.
OK, so … steel has been a contrarian play for what seems like years. The sector could never seem to get
it together after the commodity bust during the Great Recession. U.S.-based steel makers have been
particularly hit hard as cheap Chinese imports have crushed earnings. Mini-mill operator AK Steel Holding
Corporation (AKS) has
been one of those hit worst.
At the risk of being part of the financial media who cried wolf, I believe AKS could be one of the top
contrarian stocks to buy in 2017. At the least, its potential has started to bubble up in recent
Trump has pledged to spend a pretty penny of new infrastructure projects, and a key ingredient is that
U.S.-made steel. Additionally, tariffs and other protective measures have helped reduce the bleeding at
AKS and other steelmakers; Trump has only promised to strengthen these measures.
Analysts already estimate profits in AK Steel’s next quarter, and the company hasn’t pulled off a
quarter in the black for some time. If that comes to pass, it could turn quite a few bears into bulls.
One of investing’s longer but still fast-growing trends is the rise of exchange-traded funds and indexing. Investors big and small are running increasingly more money through index funds.
That’s a considerable problem for active mutual fund managers like T. Rowe Price Group Inc. (TROW).
While TROW has surged amid the market’s “Trump Bump,” the firm and its shares were suffering right up
until it, because the rise of indexing hasn’t gone away.
And still, investors might want to consider T. Rowe Price this year.
That’s because TROW is focused on retirement plans, 401ks and IRAs. It’s one of the largest providers
of such plans, and as a result, it has garnered more than $776 billion in assets
under management. T. Rowe collects a pretty penny for managing those assets, which continue to grow. After
all, you’re basically stuck with whatever 401k plan your workplace chooses.
Additionally, TROW is one of the better active managers out there. And given its size, its fees are
pretty reasonable for its market-beating performance.
As a result, T. Rowe Price is lumped in with “lesser managers” when looking at the indexing vs. active
problem. But that just makes TROW a great contrarian buy until the rest of the market see what fruits the
company will bear.
Mark Tighe via Flickr
Consumer staples are supposed to be boring stocks. And Colgate-Palmolive Company (CL) fits that bill. After
all, what is more boring than toothpaste, dog food and laundry soap?
Of course, Colgate’s problem isn’t a sudden consumer turn away from washing their clothes or teeth —
it’s the whims of the currency market playing it for a sucker.
One of CL’s best traits is that it derives the bulk of its revenues from
overseas markets. Only 20% of the company’s sales come from North America; in fact, the greatest piece of
the pie comes from Latin America, at 27%. That makes Colgate one of the best plays on emerging middle
classes, while owning a domestic large-cap stock.
But declines in currencies such as those of Mexico and Brazil have eaten into Colgate’s earnings.
Trump’s “wall” talk, rising interest rates and a muscular U.S. dollar have all conspired against the
I see this as an opportunity to snag one of the best consumer staples firms out there for a song. CL
shares are about 13% below their 52-week high and haven’t caught up to the market’s recent gains. This is
a blue-chip value, no doubt about it.
U.S. Coast Guard via Wikipedia
To say that deepwater drilling has been devastated would be putting it mildly.
Oil’s crash over the past two years or so scared most investors out of the industry. E&P firms simply
couldn’t make money with these sorts of projects.
Naturally, Transocean LTD (RIG) suffered as a result. RIG’s profits disappeared, cash flows dwindled, and the
firm was forced to cut its dividend during the downturn.
But Transocean could rise again in 2017.
OPEC’s recent cuts to production seem to be working early on, and overall, oil prices have rebounded
over the past few months. Yes, deepwater drilling doesn’t still make a whole lot of sense at $55 per
barrel … but it’s getting close. And the trend higher is enough for the larger energy firms to not cancel
current long-term projects.
Heck, it’s enough for them to start thinking about tapping the Gulf again.
This is what RIG and other deepwater drillers have been waiting on. Already, Transocean has seen some
upward earnings revisions on more drilling activity, and higher prices will only send more business their
If oil prices continue to rise as expected, contrarian investors in RIG will be sitting pretty over the
next 12 months.
David Jackmanson via Flickr (modified)
One of the best contrarian picks for 2017 is a stock that many people haven’t heard about: EZCorp Inc. (EZPW).
This isn’t a household name, but it can serve as a lifeline (albeit an expensive one) for those who
EZPW operates pawn shops and various pay-day lending stores throughout the U.S., Mexico and Canada. Its
customers typically have spotty credit histories, so it has a lucrative business based on the high
interest rates it can charge.
Those high rates have been in the crosshairs of regulators and various pieces of regulations have
sought to stem the amount of interest EZPW and its sisters can charge. The government’s new Consumer
Financial Protection Bureau has specifically targeted these sorts of firms.
But with Trump in, many financial regulations are likely out. The CFPB in particular looks to be in
Republican-controlled Washington’s scope.
Shares have already risen on that potential, but still are well below the post-recession peaks.
Courtesy First Solar
Solar is going to stink in 2017. It just is.
So why does that make industry leader First Solar, Inc. (FSLR) a contrarian stock to buy over the next 12
FSLR’s woes are twofold. First, many utilities scheduled their projects and build-outs to be completed
before 2016 ended, as lucrative tax credits were scheduled to be finished at that time. However, while
those credits were extended, the election of Donald Trump threw those credits into question.
But longer-term, the future is rosy.
While developments here at home may falter, the rest of the world is still humming right along in terms
of solar adoption. That should help FSLR get over the hump. Also helping is its industry-leading cost
structure, an investment in 8Point3 Energy Partners LP (CAFD) and a strong $2 billion in cash on its balance
First Solar will kick the can and get through the current malaise with ease. When investors get hot on
solar again, they’ll see they can buy an industry leader at a single-digit P/E.
That’s not a pretty way to invest, and FSLR will likely give you a few gray hairs. But it’ll be worth
it, and there’s always Just For Men.
Nicholas Eckhart via Flickr (Modified)
You wouldn’t peg a grocer as a growthy momentum stock, but that’s what Kroger Co. (KR) was until it started
to miss expectations.
As a result, Kroger has slipped into value territory.
For those not in the know, Cincinnati-based Kroger operates as the largest publicly traded pure-play grocery store network in the country. These stores play a variety of income and demographic levels — bargain shoppers and truffle hunters alike. This mishmash of consumers has driven Kroger’s revenues to in excess of $100 billion per year.
Troubling analysts is that Kroger’s growth has slowed to a crawl. But KR has a few aces up its
For one, its online ordering experiment is bearing fruit; ClickList is becoming a huge hit with
internet-savvy millennial customers. Revamped in-house organic and natural brands — and their higher
margins — are also helping to drive projects. These projects, as well as expanded pharmacy and convenience
store operations, should drive KR back into favor.
Meanwhile, a roughly 20% drop in Kroger shares over the past year has ensured that investors aren’t
overpaying at this point.
How far has Apple Inc. (AAPL) fallen?
Well, to the point where it’s no longer considered a no-doubt growth stock, but a contrarian stock to
Still, that’s better than a “sell” call, right?
Apple hasn’t had a smooth go of things over the past year. Its all-important iPhone sales have slowed,
the Apple Watch has stalled, and the firm was hit with a major court decision that favored its
chief rival, Samsung Electronics (SSNLF).
So while Apple did manage to put up roughly 10% gains in 2016, that was only good enough to match the
market, and far behind many of its growthier tech peers. AAPL simply is no longer a market darling.
That’s OK, though. We’re talking about contrarian investing.
Apple’s cash remains a fantastic reason to love this stock — and in fact, even more so now than ever.
With Trump looking to stem corporate tax bills for repatriating overseas cash, Apple investors could be a
few months away from a massive set of buybacks, or perhaps a big special dividend. Some analysts have
postulated that Apple could move about $124 billion back to U.S. shores for dividend purposes.
Even if it doesn’t happen, Apple still mints profits and is a cash machine that trades for less than 12
times future earnings projections right now.
Oh yeah. And the iPhone 8 could be one of the biggest overhauls ever, sparking the much-needed
rejuvenation to smartphone sales that the company needs.
AAPL might be out of favor now, but it could be a gem by the end of the year.
This article is from Aaron Levitt of InvestorPlace. As of this writing, he
held none of the aforementioned securities.
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