3 Stocks the Market Hates, And Why You Should Love Them

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you consistently invest along with the majority you are doomed to perform as they do, which is mediocre at best. On the other hand, those who zig when the market zags are often the ones who achieve returns above the garden variety.

For the most part the market is efficient, and prevailing opinion is often based on very sound reasoning. That being said, the market is not perfectly efficient and never will be. Which is awesome. If the market were perfectly efficient then investing would be boring. Optimistic opinions and pessimistic ones, no matter how justifiable, will carry certain stocks too far in one direction or another. Identifying those instances, and capitalizing on them, is what investing is all about.

Contrarianism takes courage, but the classic Buffett phrase does not go "be greedy when others are greedy and fearful when others are fearful." That's a surefire formula for terrible investing. Sometimes you have to be willing to take the plunge when everyone else is standing on the sidelines.

I have found three companies that the market isn't too fond of right now. In my humble (and by no means always correct) opinion, each one is a case where justifiable pessimism ended up pushing a stock down too far--to the point that those with the courage to be contrarians could stand to reap massive rewards.  

The most shorted stock on the Dow

Alcoa (NYSE: AA) is the most hated stock in the Dow Jones Industrial Average. Of course there are perfectly sound reasons for this being the case. Margins are headed in the wrong direction, mainly due to the fact that the price of aluminum is falling down, recently hovering around $1,830 per pound. Why has it been falling? Basic economics--when supply outpaces demand a surplus is created and prices suffer. Our planet has been producing more aluminum than we can sell in recent years, leading to a huge surplus.

Margins of Alcoa have been decimated, and its TTM net profit margin is 1%. But considering how tough times have been for the industry, that in and of itself is an achievement. 

The largest four aluminum companies in the world are Russian giant Rusal, the aluminum arm of Rio Tinto, Rio Tinto Alcan, Chinese Chalco, and Alcoa. For the full year 2012 Rusal posted a loss of over $300 million, Chalco losses totaled more than $1.3 billion. Rio Tinto Alcan had margins of less than 1/1000th of one percent.

Compared with that carnage, Alcoa's net profit margin of 1% doesn't look so bad. The world isn't abandoning aluminum anytime soon, and Alcoa appears to be best of breed in an industry that has fallen on hard times.

A Spanish telecom giant

What spooks investors about Telefonica S.A (ADR) (NYSE: TEF) is its massive debt load. How bad of a problem are we looking at? Telefonica's total debt to equity ratio is an unnerving 3.01. America's top two telcos, Verizon and AT & T have ratios of 1.59 and 0.84, respectively. 

How well has Telefonica been handling its massive debt problems? In this author's opinion, pretty well. It's been selling off subsidiaries and, to the chagrin of many shareholders, TEF cut its dividend last year. Personally, this Telefonica shareholder applauds the willingness by management to undertake actions that, while disappointing to shareholders, are in the best long term interest of the company.

Plus Telefonica announced in April that it would be paying a dividend this year, with the first payment to be made in November. If Telefonica is true to their word, it will deliver a dividend this year to shareholders of 97.5 cents. That's equal to a 7.5% yield based on the stock's current price,  higher than the dividends of both AT & T and Verizon.

Since September management has successfully reduced long term debt by over $8.2 billion, bringing it to a total of approximately $67.5 billion. They have stated a goal of bringing debt down below $61.1 billion (based on the current euro to dollar exchange rate). Their recent actions lead me to believe this goal will be achieved. 

Last but not least, a granny smith

Apple (NASDAQ: AAPL) has fallen, and boy has it fallen hard. Fears over Apple losing its edge to competitors like Samsung and LG, coupled with a sky high valuation, sent the stock tumbling. However, there are a couple of things about Apple I see that have me paying very close attention after the stock lost nearly 40% of its market value in just over half a year.

With its fanatical fans and ubiquitous logo Apple has, without a doubt, one of the strongest brands in the world. The kind of brand whose intrinsic value can't be bought for any amount--it must be earned through a reputation for delivering excellence.

Cash rules everything around me, and Apple's is sitting on a hoard of cash. As of March, Apple was sitting on a hoard of nearly $145 billion, equal to nearly 40% of its market cap! This April Apple announced the largest share buyback program in history. In May Apple raised its dividend by 15%, and still has a very low payout ratio. 

Final foolish thoughts

First there is Alcoa, perhaps the finest aluminum company in the world. Held down by low prices for a commodity that analysts view as having bottomed out, Alcoa may be down now, but won't be for long.

Next comes Spanish Telefonica. Although based in Spain, they are the dominant telco in Latin America. Holding down the stock is Telefonica's massive debt load, which management has been successfully, and rapidly, reducing.

Then there is Apple. Recently devastating losses crushed what had been a meteoric rise. But Apple is still sitting on a huge pile of cash that can be used to create tremendous value for shareholders. The phase of greatest growth is over for Apple, but it still looks like a cash generating machine to me.

Investors as a whole are fearful about the future of these great companies. Excellent, excessive fear creates opportunities for us investors. Anyone who has studied the greatest investor of all time knows that when excessive fear is present, its time to display your courage and get a little greedy.  

 

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Fool blogger Ryan Palmer owns shares of Telefonica S.A (ADR). The Motley Fool owns and recommends shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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