Back in December, on a whim, I picked up a copy of Investor's Business Daily. I rarely read this particular paper, as it is geared more toward the growth and momentum crowd, and I am an old guy who prefers the statelier Wall Street Journal.
As I skimmed the pages of great growth stories, motivational articles and business news, I found that I liked it more than I used to. As I skimmed the rankings the paper assigns to help its mo-mo customers pick stocks, I started channeling Carl Gustav Jacobi and Charlie Munger. Their advice to "invert, always invert" has always made sense to me as a way of checking my thinking and analyzing ideas.
I looked at the rankings and selected the stocks that had the very lowest rankings, instead of the very highest that everyone else uses, to see if I could find some ideas. My inner contrarian is not at all surprised to find that it not only worked, it worked very well. I identified five stocks that had single-digit composite rankings by the paper, and two months later they have combined to almost triple the market's return. Two of them, Sony (SNE) and Dawson Geophysical (DWSN), have returned more than 30% in just two months. With that in mind, I once again sat down with the paper and a highlighter, in search of ideas.
One stock from the December list reappears. Although Tronox (TROX) popped 20% almost right away, the stock has been stagnant ever since and retains a very low rating for earnings and price momentum. I like the pigment manufacturer, and I am in pretty good company. Paul Isaac of Arbiter Partners added to his stake in Tronox in the last quarter of the year, as did noted distressed-asset investor Marc Lasry of Avenue Capital. The stock trades at 90% of tangible book value and yields over 5%, so I believe it is still a good buy.
Foreign stocks were well represented on the list, as many economies around the world are even weaker than ours. I was not at all surprised to find that France Telecom (FTE) had fallen into a single-digit composite status. As conditions have gotten worse in Europe, they have gotten worse for this company. France Telecom hopes to get back on a growth track over the next few years by focusing on broadband and data services and continuing to grow market share in Spain. The company has an enormous amount of intangible assets and accumulated amortization, so getting a handle on the value of France Telecom is a little tricky, but it appears to be a good buy below the $9 level. It would not take much of a hiccup in the French stock market for the stock to trade there this year.
The Brazilian electric utility Companhia Paranaense de Energia (ELP) also makes the list of unloved stocks, according to the paper's ranking system. I have addressed the Brazilian utility sector before, and I own a little bit of competitor Centrais EIectricas Brasileiras (EBR). To help spur economic activity, Brazil's government has capped how much utilities can charge, and the stock prices have just been crushed. However, I expect conditions in Brazil to change over the next several years, and both stocks should recover along with the economy. The country has re-established its middle class over the past decade, and the 2014 World Cup and 2016 Olympic Games should help spur growth. ELP trades at 70% of book value, and I believe long-term investors can buy it at the current price.
The mining sector is incredibly weak, according to Investor's Business Daily's ranking system. If it comes out of the ground, no one wants the stuff. Gold miners such as AngloGold Ashanti (AU) and Goldfields (GFI) have low-single-digit rankings for earnings and price momentum. The iron ore producer Cliffs Natural Resources (CLF), in the wake of its recent dividend cut and disappointing earnings, has one of the lowest composite ratings I have seen in IBD. With the caveat that I am underwater on my position, I believe that Cliffs is still a decent long-term buy. It may take a while, but at some point steel demand will recover, and so will Cliffs' business and stock price. It will take patience and an ability to stomach volatility, but I believe that buyers who have a time frame of five years or longer will do very well with this stock.
Although IBD's ranking system is best known as a tool for traders who use the higher-ranked stocks to find momentum trades, it is proving to be very useful for uncovering contrarian ideas. You cannot outperform by doing what everyone else does, so inverting this popular trading approach may provide a path to profits for investors and traders alike.