3 Contrarian Buys Worth a Look

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

Want to buy low and sell high?  One way to accomplish this is to buy out-of-favor companies while selling those that everyone is in love with -- in other words being a contrarian.  Although there is no formal criterion for determining if a stock is a contrarian play, there are some indicators that can be a starting point for investors.  In my search, I usually use a criterion of a stock 40%-plus off its 52-week high with multiple bullish signals.  Some of the bullish signals included stocks having a P/E less than 12 and a P/B less than 2.  To narrow the results, I focus on stocks with high insider ownership or significant insider purchases over the past year, ideally showing that management still has faith in its business.

Below are a few stocks that piqued my interest:

Company

Percent off 52-week high

Forward P/E

P/B

Insider Ownership

Deckers Outdoor (NASDAQ: DECK)

62%

8

1.8

5%

Consolidated Graphics (NYSE: CGX)

40%

9

1.2

16%

InvenSense (NYSE: INVN)

50%

15

4.5

10%


Deckers Outdoor

Deckers seems like the classic fashion risk stock gone wrong, with most of the market calling it “UGGly.”  With a majority of Deckers’ sales coming from UGG boot, investors are betting that the brand is dead -- as evidenced by over 40% of the shares outstanding being shorted. 

However, the company is accelerating international growth by entering new international markets and expanding in others, including Japan and China, which could be huge markets for Deckers.  The company plans on increasing store count from 46 to 250 in 2015.  It is also anticipating growth from its new product lines including handbags, outerwear, and mens products.  With the stock now priced at 8 times forward earnings, this once high-flying growth stock could be considered a contrarian value play. Oh, not to mention it has the Tom Brady stamp of approval.

Consolidated Graphics

Have you ever wondered who printed all of the annual reports and proxies you receive?  Well, it may have been Consolidated Graphics, an industry leader in commercial printing, serving companies from the Apples, Disneys and Starbucks of the world to small local businesses.  It has been punished lately, with some investors believing in the story of the printing industry being in a secular decline while fierce competition is shrinking margins.

However, there might be a slightly different story.  This story involves a company that is trading with a slight premium to book value while buying back stock.  And a CFO who is purchasing shares on the open market.  The printing industry is also coming out of a decline in demand due to lack of advertising during the recession, which could result in improving margins. Nonetheless, it is highly levered with shrinking revenue in a tough industry, so even contrarians might stay clear until it shows more signs of life. 

InvenSense

InvenSense is the market leader in micro-electro-mechanical systems (MEMS), which simply means it makes the chips that enable you to move a device to perform a function, like in Wii controllers, smartphones and other consumer electronics.  Since reaching its all-time high of $22.35 in March, InvenSense has been cut in half, making the last six months a rough ride for shareholders.  This included Steven Nasiri, the founder and CEO, stepping down, a lawsuit brought upon by competitor STMicroelectronics for patent infringements, and a rising short interest. 

However, there are plenty of reasons to be optimistic of InvenSense’s future.  Its largest segment, the smartphone and tablet markets, has been on a tear, which has helped fuel the 40% plus revenue growth in the recent quarter.  The company has also started to explore other markets such as image stabilization and industrial use, which could be huge markets for continuing its strong growth.  These reasons coupled with the decline in price the past six months present a compelling opportunity.

Foolish Bottom Line

Being a successful contrarian investor is much more than differing your opinion from the crowd’s, but acting on it.  That means seizing market opportunities using both independent thinking and discipline -- capitalizing by buying on bad news and selling on good. 


XMFNpugs has no positions in the stocks mentioned above. The Motley Fool owns shares of InvenSense and has the following options: short DEC 2012 $10.00 calls on InvenSense. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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