Impressed by Contrarian Ideas

 | Dec 18, 2012 | 4:00 PM EST  | Comments
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Stock quotes in this article:

apol

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uti

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f

Before I move on from my weekend observations for reading Investor's Business Daily (IBD) for first time in many months, I want to share a couple of other observations from my experiment. Inverting the traditional wisdom and looking for stocks with the lowest possible rankings has turned up some interesting stock ideas. I will add a regular look at the momentum traders paper in search of the super weal contrarian opportunities. I uncovered two major macro thoughts by the process -- in addition to the ideas discussed yesterday.

Most of the major for-profit education stocks are trading in the single digits. Honestly, I expect most of them to stay there for some time; there are no signs of fundamental improvements in the group. Enrollments are down, defaults are high and graduation rates are abysmal for many of the companies in this sector. I am still short Apollo (APOL) and will be into the new year at least. The business model for this industry is hopelessly flawed and the sector needs a complete reorganization before it can improve.

For every rule there is an exception, and in the case of education stocks, Universal Technical Institute (UTI) is that exception. This company educates for a profit but they have a powerful niche. They train auto and motorcycle mechanics, marine and diesel engine mechanics and collision repair technicians. They have relationships with major auto and motorcycle manufacturers, as well as NASCAR. The company has a 65% graduation rate and 85% of its graduates find jobs quickly. They have extensive relationships with potential employers with Ford (F) and Harley-Davidson (HOG), leading the pack and hiring graduates throughout their dealer networks. It is not quite cheap enough yet, but when I decide education stocks have been punished enough this, will be the first one I buy.

The second observation is that energy stocks have become almost ridiculously out of favor. This sector by far had the most single digit rankings for momentum in price and earnings. Energy stocks have been hit by a slowdown in global demand, especially out of merging markets such as China. The constant chatter about alternative energy and a perception that the administration is hostile towards the traditional energy companies is also weighing on share prices. The only segment of the oil services industry seeing any positive news right now is deep water drilling. On-shore and shallow drillers are being hit with an avalanche of bad news and publicity.

The poster child for the group might well be Swift Energy (SFY). The company was originally a gulf oil play and it does still drill in shallow water locations off the coast of Texas and Louisiana, In recent years, the company has begun to move into the unconventional oil and gas drilling opportunities and has acreage now in the Eagle Ford and AWB Olmos Shale fields. The company is growing oil and natural gas liquids production at double-digit rates with oil growth expected to be 40% year over year for the fourth quarter. The stock is very cheap, trading at just 70% of tangible book value and 70% of my intrinsic value calculation. Insiders like the company's prospects, as they have been consistently buying the stock this year.

Dawson Geophysical (DWSN) is on the list of single-digit rated stocks for earnings and price momentum as well. I first mentioned this company back in November as the seismic data company showed up on a list of stocks below book value with high F-scores. It has traded up since then and is now right at tangible book value. The company has very little debt and a solid cash position with more than $7.50 in cash per share on the books. The company has expanded operations into Canada and has been hiring new crews for anticipated increased in demand in 2013. The company recently reported its first fiscal-year profit since 2009 as oil and gas companies' demand for seismic date hit record levels. As the global demand for oil and gas improves this company should see strong increased in data requests and this will allow impressive top and bottom line growth. Over the next few years, I expect Dawson to move from the lowest IBD composite rankings up to the very top of the list.

I have been impressed by all the contrarian stock ideas worth further investigation produced by a few hours with a newspaper and a pen. There are also some macro and sector facts worth processing by this exercise. I am adding IBD back to my regular reading list.

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