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12 contrarian picks, and 8 ways to catch
more
Thanks to Vic Niederhoffer and Laurel Kenner,
for teaching us all how to fish. And to Bruce Sherman, who has the
patience to wait for the right fish.
By Jon
D. Markman
Most of us
never got to see Ted Williams swing the bat, Ty Cobb run the bases
or Walter Johnson throw a pitch. But for the past three years, we
have had a front-row seat for the performance of one of the greatest
traders of our era and grown immeasurably richer for it. Not just
financially, though that may be true. But intellectually and
spiritually, and even emotionally.
Our mutual exposure to Vic
Niederhoffer, who concluded three years of columns at MSN Money last
week, began and ended with seafood, appropriately enough for someone
who taught readers how to fish, rather than handing them five
flounder to eat right now.
I interviewed Vic for the job on
April 15, 2000, at The Manhattan Ocean Club a couple of days after
the Nasdaq ($COMPX)
had just plunged 286 points during a single session to sink 25% in a
month. Expecting to meet a dour, tight-fisted, master of the
universe with a shark’s swagger and a cigar, instead I met a trim,
professorial, master of disaster with a lobster’s shamble and a
cane. He started the evening by grilling the maitre d’ with
questions on whether the market’s recent collapse had hurt business,
and then without really waiting for an answer, launched into a
prolonged oration on fin de siecle optimism and its
propensity to paradoxically induce panic. The last time it had
occurred was December 1899, he said, and history was now repeating
itself.
One might have expected the cerebral speculator to be
indifferent to the public suffering, if not actually an agent for
the decline as a short-seller. But I was soon to learn, as readers
did later, that Vic is an unflagging optimist who has proven that
panics must be bought, not sold.
Vic was wrong
on that score for the next two years as he and collaborator Laurel
Kenner persistently encouraged readers to purchase growth stocks
into the decline, but his lessons were valuable nonetheless. And
last year, the pair hit their stride, offering some of the most
original, contrarian and useful investment analysis ever committed
to pixel or paper. It all came to an end on July 1, when, in a final
meeting over smoked salmon at the Petrossian Café in midtown
Manhattan, they said the research effort had grown too expensive to
continue and resigned.
8 big thoughts
-- and how to apply them
The Spec Duo enumerated their
best ideas in their final three columns (here, here and
here),
but their education boiled down, for me, to eight big thoughts:
- Every investment idea must be quantified and tested for
veracity;
- Cycles tend to change before you can take advantage of them;
- Reversals are more lucrative than trends;
- Risk must be embraced, not feared;
- Wishful thinking, misdirected memories and deceitful market
professionals trick us into losing money;
- Supply and demand are the only truly potent forces at work in
the market;
- Hubris kills; and
- Stocks go up most of the time, so shorting is a loser’s game.
Given these gifts of insight, the difficulty is to use
them appropriately. One of my successful applications has been the
practice of buying stocks that Standard & Poor’s has booted from
its benchmark big-cap index. The tested idea embraces a risky stock
at the moment of potential reversal and takes a contrary position to
one of the market’s leading professionals. The only two
non-bankruptcy S&P 500 ($INX)
kick-out opportunities this year, AMR Corp. (AMR,
news,
msgs)
and McDermott International (MDR,
news,
msgs),
are up 760% and 26%, respectively. Three to consider that were
kicked from the S&P Midcap 400 ($MID.X)
last week are integrated steelmaker AK Steel
Holding (AKS,
news,
msgs),
projector maker InFocus (INFS,
news,
msgs)
and beverage distributor Coca-Cola Bottling (COKE,
news,
msgs).
Another
application: Screen for the worst-performing industrial sector over
the prior two years and buy its exchange-traded fund for a one- to
two-year hold. A year ago, you would have bought the Merrill
Lynch Semiconductor Holders (SMH,
news,
msgs)
after a hellacious 75% decline or the Merrill Lynch Internet
Infrastructure Holders (IIH,
news,
msgs)
after an even worse 97% decline. Those two are up 66% and 150%,
respectively, in the past 12 months. Three desperadoes to consider
now are iShares Dow Jones U.S. Utilities (IDU,
news,
msgs),
down 27% in the past two years; Merrill Lynch Pharmaceuticals
Holders (PPH,
news,
msgs),
down 26%; and SPDR Consumer Staples (XLP,
news,
msgs),
down 17%. None of these is up more than 10% in the past
year.
Ideas for patient
contrarians
Vic hated to see financial journalists call up
and quote what he called “tired old fund managers with stock to
move” -- and he particularly hated to see us pick stocks. But he
reveled in learning from fellow professionals with strong track
records who retreat from the public eye.
So at the risk of
being bonked in the head by one of the famous canes he sent to
readers who sent him good ideas, let us turn now to another of my
favorite pros -- someone who rarely offers his views to any but his
own clients. Enter the reclusive and largely uncelebrated Bruce
Sherman, head of Private Capital Management in Naples, Fla., for a
few contrarian stock ideas.
When I first wrote about Sherman
last November (“Lessons from
the man who sells to Buffett”), I noted that he was the top
institutional shareholder of several dozen small- to medium-sized
companies, many of them much-hated. The one he felt most strongly
about at the time, and which the market most detested, was software
maker Computer Associates (CA,
news,
msgs).
It’s up 81% since the column ran on Nov. 27. Another was Apple
Computer (AAPL,
news,
msgs),
which is up 45% since. A third was Scientific
Atlanta (SFA,
news,
msgs),
which is up 160% since.
In the spirit of a paean to reversal,
I called Sherman last week to see if he would identify his latest
jihads. His answer was predictably unpredictable: Newspapers. He
says they’re trading at the same valuations as six years ago, are
prodigious cash cows, and will be tremendous beneficiaries if an
economic upturn generates an upturn in advertising since all new
revenues will fall directly to the bottom line. He particularly
likes newspaper companies that also own local broadcasting
affiliates. Favorites are Belo (BLC,
news,
msgs),
of which he owns 9%; Dow Jones (DJ,
news,
msgs),
of which he owns 5%; and The New York Times (NYT,
news,
msgs),
of which he owns 4.4%. He dramatically raised his stake in each of
them this year, according to SEC records. “I love these businesses,”
he says. “The market thinks that there is no top-line growth, and
newspapers are pretty boring, and we read them but our kids don’t.
But it’s just like unfounded fears of the death of the movie
business when cable came out. These are tremendous gatherers of
content and world-class franchises. If you can buy them at low
multiples, why not do it?” He believes that Dow Jones, whose
earnings are in the tank and fetches about the same price as 10
years ago, will likely ultimately be sold at a premium by its
controlling family. He doesn’t care if it takes a while; he’s
patient.
Three other ideas for contrarians who aren’t in a
hurry:
- Topps (TOPP,
news,
msgs).
Sherman owns 27% of the marketer of the premium candy products
that kids love and parents hate -- Ring Pop, Push Pop and Baby
Bottle Pop -- as well as collectible trading cards and Bazooka
bubble gum. With no debt and an efficient plant, the company mints
money when it develops a new card or candy that’s a massive hit.
Sherman says he buys the company at times like this when there are
no hits on the horizon and shares fall into disfavor. He notes
it’s the kind of company that Warren Buffett likes to buy whole
for its annuity-like cash flow. (He ought to know, since he’s sold
four companies to Buffett in the past two decades.)
- Oppenheimer Holdings (OPY,
news,
msgs).
Sherman owns 32% of the mutual-fund complex and broker-dealer
formerly known as Fahnestock Viner Holdings. The market seems to
believe that the brokerage business is dead, but he thinks there
will always be value in advice. The company’s valuation is much
lower than Merrill Lynch (MER,
news,
msgs),
he says, “but that doesn’t mean it’s not a good place to invest
capital for the public.”
- Marcus (MCS,
news,
msgs).
Sherman owns 24% of this oddball conglomeration of motels, movie
theaters and resorts. “This is a waiting-for-Godot play,” he says
with a laugh. The assets are run adequately and they would be
worth a lot more to a larger entity. The only question is when
founder Stephen Marcus will decide to sell it. “We’ve owned it a
long time as it’s gone nowhere,” he said. “But a good value
investor will suffer dead-money risk, and we’re not afraid to have
lines in the water.”
Not for
the faint-hearted
Reading Vic’s ideas on investing over
the past three years was like taking voice lessons from Placido
Domingo. Sounds good, but he’s got something you probably don’t: A
doctorate in statistics; access to a vast database of prices and
proprietary software to manipulate it; a staff of math geniuses to
brainstorm with; nerves of steel; and 40 years of intuition.
Exploiting Sherman’s ideas is more feasible. But success from both
approaches requires discipline, self-knowledge and the mental
flexibility to expect and acknowledge change.
I’ll follow up
in the next six months to see if any of these investment suggestions
had merit.
| 2-year Outcasts |
| Company |
9/4/03 price |
| iShares Dow Jones US
Utilities (IDU,
news,
msgs) |
$53.06 |
| ML Pharmaceuticals
Holders (PPH,
news,
msgs) |
$74.63 |
| SPDR Consumer Staples
Sector (XLP,
news,
msgs) |
$20.63 | |
| Sherman's Army |
| Company |
9/4/03 price |
| Belo (BLC,
news,
msgs) |
$23.36 |
| The New York
Times (NYT,
news,
msgs) |
$44.66 |
| Dow Jones (DJ,
news,
msgs) |
$42.93 |
| Topps (TOPP,
news,
msgs) |
$9.14 |
| Oppenheimer
Holdings (OPY,
news,
msgs) |
$28.40 |
| Marcus (MCS,
news,
msgs) |
$14.66 | |
Fine Print
The Manhattan Ocean
Club was filled the evening that Vic, Laurel and I met. A year
later, it instituted a special dinner for the price of the Nasdaq;
in December 2001, you could eat for $25.00. They had to stop the
practice in 2002, Vic says, as dinner at $12.00 led them to lose too
much money and few brokers could afford to eat in New York at any
price, anyway. … Here’s a
link to the past six months of Vic and Laurel’s work. … The best
screening
tool for exchange-traded funds is at the Nasdaq Web site. Click
the name of any fund to see the names of the companies that comprise
it. Here’s the Pharmaceutical
Holders. ... To discover the top institutional owners of a stock
at MSN Money, visit the stock’s Ownership page. Here are ownership
pages for Belo;
New
York Times; Computer
Associates; and Topps.
… My own list of beaten-down S&P stocks with turnaround
potential has done pretty well in the last two weeks (“Ride out a
reversal with down-and-out stocks,”). Grocery chain
Winn-Dixie Stores (WIN,
news,
msgs),
the sorriest looking of the lot, is up the most with a 10%
gain.
Jon D. Markman is senior investment strategist and
portfolio manager at Pinnacle Investment Advisors. While he cannot
provide personalized investment advice or recommendations, he
welcomes column critiques and comments at jmarkman@oddpost.com. At the
time of publication, he had no positions in stocks mentioned in this
column.
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