Contrarian Industries

One way to look for contrarian ideas is to look at the worst performing industries (needless to say this is the opposite of what growth or momentum investors would do.) Shown below are the worst industries in the last 5 years, according to Dow Jones and Morningstar categorizations. (as usual click on the image for a larger, more legible, table.)






The lists are quite similar. The best performing industries are those in the commodity complex. The worst are anything that got infected with the subprime virus: homebuilders, banks, furniture makers, and so on.

I would avoid areas like homebuilders and rather look at the medium-term underperformers like paper, media, automobile parts suppliers, insurance, and so on. One of the reasons is because industries that did really well in the past rarely lead in the future. Given that we just had an unprecedented real estate bubble, it is not clear when homebuilders, banks (with lots of real estate assets), and so forth, will recover. It is quite possible for them to underperform even if a bull market started today. In contrast, industries such as media, insurance, and even the struggling auto industry are totally out of favour and have been underperforming even without the real estate problems.

The risk with the latter underperformers, though, is that some of them are seriously in trouble (eg. American auto manufacturers) while others are in industries in secular decline (eg. paper, newspapers.) Many businesses in these industries are most likely value traps so one needs to avoid them at all costs.

Having said all that, valuation is what matters and it is quite possible that, say, a homebuilder is a better investment if the numbers are good. I should also note that industry performance in other countries may differ. For example, newspapers in Asia are growth industries whereas they are an almost-bankrupt industry in America and Canada (they are also doing ok in Europe.) Some regions like Europe are hitting low valuations so it may be worth looking there in various industries rather than paying a risk game trying to avoid value trips in America.

Comments

  1. AnonymousAugust 27, 2008 at 6:42 AM

    Hi!
    I am contacting you through this contact form as there was no email address available. If you are in interested in getting a banner/ logo/ header/ icons/ templates/ business cards/ mascot designs without money, in return we need text links from your site http://can-turtles-fly.blogspot.com. Please get back to me using the email address I have entered if you would be interested in discussing this further.

    Name: Joe Nathan
    Email id: joenathanls@gmail.com

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say...
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt...
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>