Crippled by a Lie, Profit Margins Exploding, and “Location, Location, Location”

Finally we finish up the "contrarian" picks -- three final "Contrarian Bonanza" teaser ideas for 2012 revealed.

By Travis Johnson, Stock Gumshoe, January 17, 2012

More “Contrarian Bonanza” picks, you ask?

Well of course!

There are several new teaser ads stacking up in the Thinkolator’s inbox, but before we get to those … let’s close the book on the “contrarian bonanza” picks from the Weiss folks as they tease their Million-Dollar Contrarian Portfolio.

There are three left of the seven picks, so we’ll hold off on our endless bloviating for once, and just try to get through to our answers as quick as we can (or if the Thinkolator can’t answer, at least a guess) … and give you a chance to do your own cogitating on the ideas we reveal.

So … in order, then:

“Contrarian Bonanza #5 was crippled by a lie.

“Last November, investors beat this stock half to death when a major research firm erroneously announced that this company had enormous exposure to European debt.

“The research firm has since backed away from its false claim. But the stock’s price is STILL so low, you’d think it IS in danger of collapsing the next time Europe hiccups!

“It simply isn’t fair: This is an outstanding company with some of the best management in the entire financial sector. It has never needed, nor has it ever taken a bailout from Washington — or from anybody else, for that matter.

“If this company’s stock were to merely catch up with that of its average competitor, you’d be looking at a 65% price explosion.

“But this company is in far better shape than most of its peers!

“With all that it has going for it — and especially with the flight to quality I expect in this sector in 2012 — No guarantees of course, but I’m counting on this stock to AT LEAST DOUBLE Dr. Weiss’ investment in the year ahead. And unless I miss my guess, it could do the same for you!”

This one, friends, must be Jefferies (JEF)

This is an investment bank, and you may well remember a couple months back when it was clobbered due to chatter about their Euro debt. There’s been, as of last month, some short covering … but there’s still a large short position, so clearly there’s still a fair amount of uncertainty among investors when it comes to the value of Jefferies’ investment portfolio and their business franchise.

We last covered JEF because another teased stock, Leucadia (LUK), is a very large holder of JEF shares — and a recent acquirer, which gives at least a bit of a “value investor” stamp of approval to the stock. So if you’re interested in JEF (I haven’t analyzed the stock further), you might find that LUK gives a bit of a discounted exposure to Jefferies shares.

JEF has recovered a bit since the November portion of their euro swoon that had the shares bottoming out around $10, but is still certainly on the inexpensive side with an earnings multiple around 10 and a share price very near book value … though of course, the certainty of that book valuation is part of what’s been placed in some question. For deeper thoughts than that, you’re on your own, but JEF has been aggressively covered in the financial press in recent months so you should find no lack of information.

And of course, they will also trade on sentiment for investment banks in general — as today’s adoration of Wells Fargo and anger at Citibank serve to emphasize that if you’re a financial company “boring” banking is good, investment banking and trading in your own accounts maybe less good.

Moving on …

“Contrarian Bonanza #6 got creamed when its profit margins plunged last year.

“In 2011, wage inflation in China, combined with a temporary spike in cotton prices, caused this clothing company’s costs to soar. As a result, its profit margins shrunk significantly and the crowd stampeded for the exits.

“But now, the Chinese economy is cooling and upward pressure on workers’ wages has eased. Plus, cotton prices have plunged more than 57% since their peak last year.

“As a result — and completely unnoticed by most investors — the company’s profit margins are exploding higher.

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“This stock would have to jump 59% just to catch up with the valuation of its average competitor — and I fully expect it to at least DOUBLE after we buy it for Dr. Weiss’ portfolio!”

You might not have noticed in that group of clues, but despite the adequate verbiage there are very few specifics in there to feed into the hungry maw of the Thinkolator.

So we’ll have to guess: this is probably Hanesbrands (HBI)

More info here in a recent SmartMoney article. The general trends fit — concern over wage inflation and cotton inflation generally hit Hanes more directly than many other stocks, and it often serves as a proxy for the cotton clothing manufacturers when pundits talk about cotton prices and their impact on margins. Like most of these “contrarian” picks, it’s looking quite cheap on a PE basis, with forward and trailing PE multiples both in the single digits.

Let’s see if we can do better than guess for the last one:

“Contrarian Bonanza #7 has been beaten half to death by
investors just because they don’t like its location!

“It’s an energy company with huge holdings in the Middle East — particularly in Egypt, where we saw protests last year. For that reason alone, its stock is selling for about one-sixth the valuation of its average competitor.

“This contrarian bonanza would have to surge more than 377% just to catch up to its AVERAGE peer!

“But this stock is definitely NOT average.

“It produces more than 12,000 barrels of oil a day — up 22% from a year earlier — and the CEO swears on a stack of Bibles that number will soar to 20,000 barrels this year.

“He definitely seems to know what he’s talking about; cash flow from operations is up 60% in the past year. And In the third quarter of 2011, net income shattered all records.

“Any way you look at it, this is a ‘must-buy’ stock at these prices — I can’t wait to tell you all about it bright and early on February 1!”

So have we managed to identify all of the “contrarian bonanza” picks two weeks before they’re actually published? Perhaps, I’m quite certain about almost all of them except Hanesbrands, and it seems like this last one must be … TransGlobe (TGA)

A company I don’t believe I had ever heard of.

And yes, there is definitely a contrarian vibe to it — after all, if you’re going to stand up and say that “location” is unimportant when a company’s primary assets are in Yemen and Egypt, then you’re definitely betting against the house.

TransGlobe has indeed been producing at a rate of about 12,000 barrels of oil/day, though it was problems with their pipeline in Yemen (yes, the kind of problems you’re thinking of: stuff blowing up) that had that number down to 12,000 for 2011. Here’s a quick note on the details of those pipeline problems from October.

And they also just closed a big acquisition in Egypt to help keep production growing despite their Yemen troubles — notes on that here from about two weeks ago. And the CEO has said that they should be over 20,000 barrels/day by the middle of this year, so that’s pretty rapid production growth — though I don’t know if he swore on a stack of bibles, or if the Yemeni’s or Egyptians would be impressed if he did so.

TransGlobe, assuming our teaser solution is correct, is almost entirely reliant on Egypt — all of their reserves are in either Egypt or Yemen, but as of their last reserves release (today, coincidentally enough) Egypt is now close to 90% of their proved reserve base (in part because of cuts to Yemen reserves, but mostly because of growth in Egypt). So the stock is cheap, as are many oil stocks, and you might argue that it’s too cheap given its solid growth in reserves and expected earnings growth in the coming years, but it probably depends on more than anything else on how you price Egypt risk.

And no, I have