Top “Contrarian Bonanza” Picks from the Million Dollar Contrarian Portfolio

Latest "against the grain" picks teased by Martin Weiss and Tom Essaye

By Travis Johnson, Stock Gumshoe, January 12, 2012

It’s been quite a while since I wrote about a Martin Weiss teaser — he publishes a number of letters at Weiss Research, and this is is “contrarian portfolio” letter that follows along as an analyst (Tom Essaye in this case) invests Weiss’ own million dollars. They haven’t been teasing many specific picks for this or the similar letters in recent years, at least not that I’ve noticed, but they appear to be back on board the teasing train now.

The basic pitch of the ad (they don’t call it an ad, they say it’s an online investment conference) is that we’re going to face the same troubling and volatile market in 2012 as we did in 2011 — and that investors will continue to be hoodwinked by Wall Street into buying high and selling low, chasing after elusive trends and being overly reactive (that’s my take on what they say, at least).

And Essaye, who’s apparently making the picks, tells us that he’s got a handful of contrarian ideas that will help you go against the crowd, buy companies that are undervalued relative to their peers or thought of too pessimistically, and profit when they come back to a “normal” valuation. Which is basically page one of the value investor’s handbook: “buy what the crowd is selling.”

He’s apparently planning to buy some broad inverse index ETFs as a core position to bet against the market, but he’s also about to …

“… begin buying the stock of high-quality companies that have been unfairly beaten down by the Wall Street crowd.”

And what are those high-quality beaten-down companies? Well, that’s where the mighty, mighty power of the Thinkolator comes into play — he won’t tell us, but he does provide enough clues to entice … let’s look at ’em one at a time and see how many we can get through today:

“Contrarian Bonanza #1 is a find of epic proportions.

“This consumer products company markets a super-popular product that has taken the world by storm. But late last year, its earnings were slightly less than investors expected — and the crowd sold the stock as if the company was going out of business.

“In a single day, this stock plunged 40%. Today, it sells at 13 times earnings — nearly 55% lower than its average competitor.

“But that’s in our favor. Because when you look deeper, the picture changes radically.

“For one thing, the company’s total revenues grew a staggering 31% in the first nine months of last year — and analysts expect that growth to be reflected in the company’s fourth quarter as well.

“Profitability is also improving. Net income was up a whopping 20% in the most recent quarter.

“And the company has $220 million in cash and ZERO debt!

“In fact, if this company’s stock was to catch up to those of its peers, it would have to surge nearly 40%.

“But this Contrarian Bonanza could make us much, MUCH more than that! Consider this …

“A similar situation occurred in this very same stock back in 2010: The stock plunged 17% in one trading day and 27% in three days.

“At the bottom, contrarians who bought when the crowd was selling could have snapped up all they wanted for just $10.30 per share.

“Within three months, the stock had spiked to $19 — enough to nearly DOUBLE contrarian investors’ money.

“Plus, within one year, it hit $32.47, spinning off a 215% return — and I see the opportunity for us to go for the same kinds of gains!”

Toss all that into the Thinkolator, and we learn that this is, believe it or not, Crocs (CROX).

I know, they’re still in business — really! I had written these guys off for dead back in 2009, when everyone and his brother was making (even cheaper) knockoffs of the little rubber fad sandals that are Crocs’ claim to fame, and they had borrowed lots of money and probably expanded too quickly … but they fought off the competition, rebuilt their balance sheet, and they’re still around and growing, and are hitting about a billion dollars in sales, far higher than when they initially burst on the scene as a stock market momentum darling in 2006 and 2007. Go figure.

So they’ve apparently fixed some of the problems in the business that almost put them out of business two years ago, they’ve become a growth company again, they have new styles and new fashion attention and celebrity connections, and I guess they’re not just for kids and gardeners. They did post 20% revenue growth last quarter, and they do have $220 million in cash, and those other clues about their past stock performance are also matches (though it would have been tough to pick the right moves in trading around those big volatile swings, I assume).

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Unfortunately for Crocs, they issued a profit warning late last year, essentially throwing cold water on the analysts who were foreseeing a return to increasing growth rates. And the stock got cut almost in half, so that’s the “single day” decline from the tease — that was when they preannounced some bad news about their third and fourth quarter sales numbers, third quarter came in with earnings about 25% below prior expectations and the fourth quarter revenue number is lower than the third quarter and only a 15% or so sales jump from the fourth quarter of 2010. So still growing, but not as fast as analysts had projected.

Which is why the shares trade at a discount to their relatively small number of “peer” companies — there aren’t that many fad fashion footwear stocks to compare them too, but Deckers Outdoor (DECK) is the obvious choice (they brought us Ugg Boots, which have also had a far, far longer 15 minutes of fame than I expected — I clearly have to consult with Mrs. Gumshoe about all matters fashion-related, because I plain don’t get it most of the time). And yes, CROX would have to get a bump of about 50% to be valued similarly to DECK, and they do have some comparable numbers otherwise — similar margins, etc.

Don’t know if that will happen, of course — they guided to expect that 2011 will hit a billion in sales, which means they’re fairly close to where analysts expect them to be (with those lowered numbers) for the fourth quarter, and we’ll see if profitability is also in line. They are still alive and growing, they’re even opening up some of their own branded stores in a few malls as a test, so perhaps they’ll continue to please consumers and keep growing. I’m a bit skeptical, but the market is pretty clearly skeptical too at this point, so yes, you can pencil this in as a “contrarian” investment — of course, betting against the crowd doesn’t always work.

CROX is now trading at a forward estimated PE of about 12, and they’re expected by analysts to keep their earnings growth in the high teens for several years — so if the analysts are right, which is a big “if” for any stock but particularly so for one with consumer fashions and fads as a driving force, then they do look pretty cheap, that’s a Price/Earnings/Growth (PEG) ratio of 0.6, and lots of folks still adhere to Peter Lynch’s guidance that a PEG under 1 means it’s at least worth a look. Their balance sheet problems are behind them, though they did just sign up for a new credit facility so they are apparently able to borrow for expansion when needed, and they do have quite a bit of cash … but they don’t pay a dividend or anything, so you’re not getting your grubby little mitts on it anytime soon.

Sound like your kind of contrarian pick? I’d have to hold my nose a bit to get into CROX because of my memories of their collapse a few years ago, but that’s often just the kind of thing that should make you think you’re really being contrarian. If you’ve got a thought on CROX or any of their competitors — or, for that matter, on Martin Weiss and the nature of contrarian-ness — please shout it out with a comment below. I’ve blown all this time digging into CROX, so we’ll catch up with the rest of those contrarian ideas in the days to come.

And if you’ve had recent experience with the Million-Dollar Contrarian Portfolio, please share your thoughts in a review by clicking here — we’ve had hundreds of (very critical) reviews of this letter, but they reflect a different analyst’s work during the crash and rebound years, and perhaps a different letter than the one they’re now pitching.