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When it comes to investing in the stock market, it pays to be skeptical. Not only should you not believe everything the analysts tell you, but you have to discount what the companies are telling you, too.
Going against the crowd can pay off handsomely. Some of the market's legendary investors are or have been contrarians: Benjamin Graham, Warren Buffett, John Neff, Marty Whitman. Like "Wee Willie" Keeler, baseball's greatest place-hitter, contrarians "hit 'em where they ain't."
When the crowd abhors a stock, the contrarian wants to look more closely at it. When the masses crowd into one, the skeptical thinker says it's time to move on.
- Video: How to be a contrarian
Today I'm looking at a new breed of contrarian, the CAPS skeptic. To qualify as a skeptic, a CAPS participant will have rated more stocks as underperformers than as outperformers.
Skeptics don't think like most investors. They're willing to see a stock's downside potential as well as its upside. They're contrarian in that they find more downside potential than upside. We ought to take notice of skeptics who are also top-rated CAPS players, a designation earned by being right far more often than not.
Here are some recent recommendations from five of the top CAPS skeptics:
| Company | Industry | Forward price/earnings ratio | CAPS rating (out of 5) |
|---|---|---|---|
Credit services | 9.10 | ***** | |
Farm and construction equipment | 13.60 | **** | |
Coal | 27.40 | ***** | |
Internet search | 137.50 | *** | |
Footwear | 34.20 | ** |
The stocks above are not automatic buys. Just as a list of these players' worst stocks would not be a list of stocks to short, this list of favorites requires a little more thinking and drilling down into the financial statements. But it's a place to start.
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Don't bid adieu to Baidu.com
In a space where even Google (GOOG, news, msgs) plays second fiddle to its string quartet, there's growing belief that China's paid-search leader Baidu.com (BIDU, news, msgs) will pop a string somewhere along the way. With a market multiple stretching credulity at 188 times trailing earnings, it seems there's room for contraction.That doesn't deter CAPS All-Star "KatWoman50," who thinks demographics will trump any sky-high valuation. "China is barreling into the 21st century, so a (Chinese) language search engine has to succeed," she writes. "Government-backed monopoly; high price; (but it's) time to jump on the train or get left at the station."
That's a view endorsed by another All-Star, "Novavm," who has a 99.98 player rating. Considering that pundits have been (inaccurately) forecasting Google's fall from grace almost every week, perhaps there's something to be said for a mirror image in China.
"I believe this . . . is the baby Google," Novavm writes. "One of the fastest-growing (companies) in the world in the fastest-growing economy and most populous country in the world." The CAPS player also cites "triple-digit" growth in sales and earnings per share over the past 10 quarters, and says Baidu.com controls 71% of the online search market in China. "With high demand for the shares and very low available floating shares . . . this is the place to be."
Which stocks are your contrarian picks? Share your views on CAPS.
This article was reported and written by Rich Duprey for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.
