3 Contrarian Ideas You Should Take a Look At

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

The average of all analyst's opinions is what we call "market consensus." Even when the consensus is mostly right about what the future might look like, there are sometimes when the consensus may err.  For the following three high-quality companies, I disagree with the market consensus. Let's analyze each company individually and see where my disagreements lie. 

China's demand growth is under-rated

The Hershey Company (NYSE: HSY), which is the largest North American manufacturer of quality confectionery products, is expanding margins primarily due to strong consumer demand for chocolate, favorable commodity cost changes and pricing power. Everyone agrees with what I just stated and, moreover, many are sure about the company's ability to reinvest in advertising while growing its bottom line (12%-15% EPS growth).
 
Where I disagree with most analysts
 
I believe that the incipient Hershey China business and the recently acquired Brookside Farms brand will give the company huge upside to consensus estimates (EPS and top line). I think the China business can grow to $500 million by 2017 from $90 million currently.
 
Hershey trades at 2013 23.5 times P/E. The company sells at a 30% valuation premium to its food peers. This premium may sound high, but it is actually justified by the company’s revenue growth rate, which is significantly higher than its peers at 5% to 7%.
 
Betting on market share gains
 
According to consensus, Lazard (NYSE: LAZ) might be a long-term market share gainer across both its asset management and financial advisory franchises. Every analyst in the industry knows about Lazard's current expense plan, its continued solid execution at the asset management arm and the company's good progress in the M&A up-cycle.
 
Where I disagree with most analysts
 
The market is under-appreciating Lazard's asset management franchise and the bank's ability to improve margins up to +25% through the completion of a $135 - $145 million expense savings program.
 
 I think that Lazard's 2013 19 times P/E multiple is supported by an ROE that I expect to be around 33% and an ROA that I would expect at 7%.
 
Always glittering diamonds.

Most analysts expect Tiffany & Co (NYSE: TIF) to keep on doing well. As a matter of fact, most expect the company to continue gaining share across all of its markets. That said, many do not seem to expect high top line growth  to be sustainable.
 
Where I disagree with most analysts
 
I expect high-end jewelry to offset targeted and structural declines in the company’s sub-$500 jewelry business and expect revenue growth of +8% to be sustainable. Besides, I see potential for margin expansion to a level above 20% given two current trends: a more favorable commodity cost environment, and a mix shifting towards more profitable businesses (more profitable regions such as Russia, where the company is taking over the distribution).
 
Trading at 2013 22 times P/E and 11 times EV/EBITDA, I think Tiffany offers one of the best alternatives withing luxury brands in general and global jewelers in particular.
 
Bottom line
 
The three companies named above are all well regarded by the "general consensus." Nevertheless, I think they offer more opportunities than what the consensus expects from them. Above all in Hershey's case I believe the market is not seeing the tremendous top line growth that can be achieved through the Chinese market. In Lazard's case, I think the market is under-estimating the ability of the bank's management to boost margins through cost cutting. On the other hand, the market seems to be under-estimating Tiffany's growth potential. 
 

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Federico Zaldua has no position in any stocks mentioned. The Motley Fool owns shares of LAZARD Ltd.. 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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