One Contrarian Play That Can Protect Your Portfolio
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are thousands of investment styles being used in the financial markets today. From Benjamin Graham’s intrinsic value methodology to Joel Greenblatt’s Magic Formula, there is no shortage of (theoretically) profitable tactics for ardent investors to emulate if they so choose. Amid fears that the global economy is now entering a perfect storm, it is becoming increasingly harder for individuals to view their portfolios with any sort of optimism. This past week, lower than expected U.S. jobs data and reports of slowing Chinese growth have fueled the bears’ fires, so to speak. There are still ways to profit in this environment, however, specifically by searching for stocks that have fallen out of favor in the market. Known as contrarian investing, this strategy is not for the faint of heart, but may be just what the doctor ordered.
David Dreman, one of the most well known contrarians, is the founder and chairman of Dreman Value Management, a hedge fund with nearly $5 billion in assets under management. Since the days of afros and Saturday Night Fever, Dreman has been implementing these tactics with moderate success, outperforming the S&P 500 Index by 7 percentage points over the past decade. Currently, one of the fund manager’s top stock picks is Jarden Corp (NYSE: JAH), which has bounced nearly 50 percent year-to-date.
Operating in the home furnishings and fixtures industry, Jarden has flourished in an area of the economy that has remained relatively flat post-recession. The company has acquired a host of other businesses in recent years, and holds a portfolio of nearly 100 brands, from Coleman camping gear to Rawlings sporting equipment. It is this acquisitive growth that has provided a boon to the company’s revenues and earnings, which have grown by 29.6 and 51.9 percent since 2009, respectively. In the company’s first quarter earnings report, Jarden execs reported record results, grossing $1.50 billion in sales with a net income of $0.47 per share. Driven by a gross margin of 28.1 percent, both of these results trounced Wall Street’s estimates.
From a valuation standpoint, shares of JAH are trading at a PE ratio (17.5X) below the industry average (20.7X), and its own 5-year historical average (21.3X). Moreover, its current earnings valuation is also below competitors Newell Rubbermaid (NYSE: NWL) at 38.0X, Electrolux AB (NASDAQOTH: ELUXY.PK) at 18.2X, Blount International (NYSE: BLT) at 18.0X, and Mohawk Industries (NYSE: MHK) at 25.3X. When growth is factored into the equation, a similar story is told; JAH is trading at a PEG ratio of 0.7. Typically, a PEG below 1.0 signals undervaluation. Over the past half-decade, Jarden’s earnings have historically traded at a 41 percent premium to the S&P 500’s average. This year, they appear cheaper, trading at just a 25 percent premium.
Now, the company has also been very much the cash cow, growing its operating (47.7%), and free cash flow (97.4%) by extraordinary rates between 2010 and 2011. If the start of this year is any indication, we could see the company increase its dividend yield from 0.8 percent to an amount in the 1 percent range. It’s also notable that shares of JAH are trading at a price to cash flow ratio (8.7X) below industry norms (10.8X) despite this exorbitant expansion.
By the end of 2012, analysts are expecting Jarden to reach earnings of $4.12 a share – an increase of 20.2 percent from 2011. If this consensus holds, fairly valued shares of JAH should eclipse $87 by next summer. Even if the stock’s valuation stays constant, prices should rise above $72 a share. Jarden currently trades in the $45 range, making a 60 percent return very much a possibility. WealthLift’s Sentiment Index currently rates Jarden as a strong buy, with the majority of the community’s users placing an “overperform” grade on the stock. Sometimes, it seems that contrarianism is the best way to make a play in an uncertain market environment
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Blount International. 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.If you have questions about this post or the Fool’s blog network, click here for information.