CONTRARIAN STOCKS
A disciplined, value-based investment strategy that makes sense in an ever-changing world
A disciplined, value-based investment strategy that makes sense in an ever-changing world
When I started writing on Contrarian Stocks in February 2023, I knew that I was a student of Benjamin Graham, the father of value investing, in that I had read and agreed with many of his underlying principles, viz. the concept of investing with a margin of safety. However, grappling with out-of-date techniques to find bargain stocks made little sense to me. After all, it is my view that to consistently beat the market you must be constantly ahead of the market and not lingering in the methods of the past.
It's also worth acknowledging (and admitting) that twelve months ago, whilst I felt I had a satisfactory understanding of the basic principles of accounting, valuation and investing, the realm of portfolio management remained a puzzle. As such, my stock picks were all over the place and, combined in a portfolio, they lacked cohesion. And so, I was perpetually left confused asking myself “What do I cut and what do I stick with?” With a lack of trust in my own investment strategy, my overall portfolio suffered.
Fast-forward to present day and whilst I still identify as a value investor at heart, I’m beginning to discover my own focussed and niche way of investing. Whilst my approach for finding undervalued stocks may not always align with your views, I aim to present it in such a way that, hopefully, you can still gain insights.
My strategy for finding stocks is quite simple, centred around turnaround opportunities involving historically robust businesses. I gain immense satisfaction from scrutinising such "roadkill" situations and the closer the share price to zero, the more interested I am. The worse the shareholder returns have been over the past few years, the more eager I am to understand the company's story. To be clear, I’m not solely interested in low multiples. What I want to understand is why (relative) multiples have compressed in these companies so massively and whether they can stage a sustainable comeback. Screening for these companies isn’t easy because they can come in all shapes and sizes and a reason this works is because it’s not purely quantitative. Institutions just wouldn’t mop these stocks up, making it a form of unconventional, contrarian investing.
It’d be no surprise for you to hear that, usually, these companies do have structural problems and there are no silver bullets to stem the bleeding. New management are likely coming in, accompanied by profits and cash flows falling off a cliff and sell-side analysts writing off the future prospects of the business. Often, too, the company is suffering from substantial amounts of leverage which makes the situation even more challenging (and more despising!).
Buying into new CEOs is usually a characteristic of my picks; however, I don't immediately commit my capital straight away. I watch what they do for at least a few months. If their approach involves aggressive cost-cutting and corporate restructuring, it's an instant turn-off for me. I'm more inclined towards CEOs that unveil strategic plans with manageable unknown factors, take a hands-on approach and are focussed on creating long-term value for shareholders.
What also tends to attract me is ruthless asset sales combined with strategic spending on core segments. Usually, these companies have suffered from a lack of vision, coasting for years before the problems have come to light. When non-core segments are a hinderance, I advocate for sales. However, you will rarely hear me call for such sales on this site because I don't agree with a brash, activist approach to investing. Further, I only invest after management have made it known that they have decided to make such asset sales (where appropriate, of course). Similarly, if core segments have been underperforming, I encourage thorough investment now to revitalise them before it’s too late. Finding management that think in a bold, decisive way like this is a refreshing rarity.
The final benefit to investing in turnaround situations is, if I invest, I’m buying purely on a going-concern basis. When I invest, it's with the understanding that results will materialise over the course of many years. In this way, I don’t have to worry about short-term events like quarterly earnings. This approach forces patience upon me which, by extension, means I cannot make silly trading errors. As a portfolio manager, I’ve structured my strategy in such a way that I ensure that my discipline is untested while earnings can internally compound over time for me.
Hopefully, after getting a brief understanding of what Contrarian Stocks is striving to achieve, you will join me in navigating the tumultuous world of investing where each stock is more than a number, strategies are unfolding in real-time, CEOs make or break and opportunities are abound for those willing to take the road less travelled.
HV - 24/02/2024
Last Updated - 18/02/2024
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