The Ultimate Contrarian
James Boric
According to The American Heritage Dictionary, a "contrarian" is an
investor who makes decisions that contradict prevailing wisdom.
If that means looking for stocks that have been beaten down and
forgotten -- but are fundamentally and technically capable of a
substantial rise, than I must be a contrarian. Does it really
matter if those stocks come from the oil industry, the tech sector,
gold or the Internet services?
A good investment opportunity is a good investment opportunity.
Period.
Yet there seems to be an assumption in the investment community
that anyone who makes money in tech stocks or, worse yet, Internet
stocks, isn't really a "contrarian." Rather, they are a part of the
leftover Wall Street herd that still believes all dot-com stocks
will someday rise again to $80 a share.
That's the most ridiculous thing I've ever heard. And it's time to
dispel that myth.
In early March, in an essay published by The Daily Reckoning, we
took a look at E-Loan Inc., an Internet stock on the rise, as a
potential investment opportunity. Talk about being a contrarian and
going against the grain. For three years Internet stocks have been
the butt of everyone's jokes.
Yet, E-Loan Inc., an online lending company, brought in over $100
million in sales last year and realized more than $10 million in
net income. At the time, it was selling for 12.8 times earnings,
1.32 times sales and its revenues were up over 50% from a year ago.
It hardly resembled the dot-bombs that blew up in 1999 and 2000.
And that was precisely my point back in March. E-Loan was making a
profit, had solid fundamentals and was growing its business.
But there was something else about E-Loan that caught my attention.
Over a 10-day span the stock fell 14%. As a trader, this intrigued
me. Why was a stock as fundamentally sound as E-Loan falling in
price so abruptly?
To answer that question I pulled up three of my most trusted
technical charts. I saw that over an eight-month span, E-Loan stock
rose 94%. And after doing a little more digging, it was obvious
this recent fall was nothing more than a bunch of investors taking
profits.
Fundamentally, E-Loan was as solid as ever. And technically, E-Loan
was oversold and ready for a rebound. This was a no-brainer. E-Loan
was almost a sure bet to rise.
If you took my advice and bought shares of E-Loan in early March,
you made 40.7% profits in the past five weeks. Not a bad return for
a little over a month's time.
As an investor or a trader, you should strive to find fundamentally
and technically sound stocks, like E-Loan, in beaten-up sectors of
the market. And as a contrarian, it's your duty to find these kinds
of stocks -- the ones everyone else forgets about or simply refuses
to look at.
That's exactly what your "gloomy" editors at The Daily Reckoning
did when they recommended you buy gold in the late 1990s when the
Wall Street heard really was stampeding. With irrational exuberance
sweeping the market by storm, it was only a matter of time before
the bubble burst.
The U.S. Dollar Index peaked at 121.29 late in 2000 (right now it's
at 100.36) and the NASDAQ, Dow and S&P 500 were all outrageously
overvalued by any historical perspective. It made perfect sense to
buy gold stocks in 1999.
But only a few brave souls had the guts to buy then. Investing in
gold in 1999 meant going against the crowd. It meant taking the
risk of looking silly in front of your peers. It meant finding the
courage to do what made sense, not what was popular. It meant you
avoided serious losses in overbought stocks - and steady gains as
gold rose from a $253 low to $325 where it sits today.
Looking back, you'd be hard-pressed to find any gold stock that
hasn't at least tripled since the late '90s. It paid to invest in
gold when no one else was. And it paid to invest in E-Loan, a hated
Internet stock, five weeks ago.
Still, many investors missed out on E-Loan simply because of its
title as a tech or Internet stock. Oh well. Too bad for them.
Last I checked it wasn't against any domestic or international law
to invest in gold and tech at the same time. And it certainly
doesn't go against the contrarian mantra of finding winning stocks
in neglected sectors of the market -- no matter what those sectors
are. In the last three weeks, I've recommended several Internet
stocks and junior gold miners to my readers.
Both have done well. Imagine that...
Maybe I don't fit the mold of a typical contrarian. I use technical
analysis in conjunction with fundamentals to find stocks on the
rise. I look to the Internet sector as easily as I do the gold
sector for great investment opportunities. My picks aren't always
popular among my peers.
But you know what? I could care less what people think about me as
long as we're making money - whatever class of investor that puts
me in.
James Boric,
for The Daily Reckoning
www.dailyreckoning.com
Editor's note: James Boric is the editor of the small-cap advisory letter Penny Stock Fortunes, where he looks for great companies at penny stock prices. James also writes a weekly e-mail called the CXS Alert.
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