For Immediate Release
Chicago, IL – January 4, 2012 – Today, Zacks Investment Ideas feature highlights Features: Waddell & Reed Financial Inc. (WDR - Free Report) , Legg Mason Inc. (LM - Free Report) and Invesco Ltd. (IVZ - Free Report) .
Think Contrarian This New Year
A volatile period like now is the best time for a contrarian approach as it gives you an advantage every time regular investors overreact to negative developments. And once exaggerated fears subside, investors will wake up and rush to pick stocks that they had previously overlooked.
Concerns about the European situation remain center stage. Coupled with our own unrelenting problems -- high unemployment, sluggish economic growth and political dysfunction -- the European crisis is showing up in enticingly cheap valuations of many stocks. But you don’t know whether this is the time for bottom-fishing of out-of-favor stocks.
Despite its roller-coaster ride in response to the multiple domestic and international concerns, the U.S. equity market performed relatively better than many other markets in 2011. This shows that in-favor stocks have already received plenty of attention, helping them reach their current levels.
However, general pessimism has significantly lowered the price of many out-of-favor stocks to a point that exaggerates the risk associated with them. So, identifying and buying such out-of-favor stocks for a long period of time could be a good strategy.
How to Find Out-of-Favor Gems
In order to act against the tide and discover these hidden gems, you have to dig the fundamentals and valuations of the stocks a little deeper. Primarily, you should focus on earnings, book value and cash flows of the companies.
If you see that the price performance of a particular stock with respect to these four metrics belongs to the bottom section of the market, it may be a sign that it is not getting investors’ attention. Keep in mind, however, that every depressed stock is not worth getting excited about.
Now you have to short-list those ignored stocks and look for good fundamentals. Most often, depressed stocks are also under-performers. However, if a stock is out-of-favor despite good fundamentals such as strong return on equity, better-than-average current ratio and healthy debt-to-equity ratio, buying it could give you above-average returns when the market gains momentum.
Not that this is a fail-safe strategy. But consider this a very good starting point.
3 Contrarian Picks
While there are several contrarian stocks that you may select based on the above analysis, we believe the following three asset managers would be good additions to your portfolio:
Waddell & Reed Financial Inc. (WDR - Free Report) : WDR is an underwriter and distributor of 41 mutual fund portfolios, including 18 Waddell & Reed Advisors Funds and 12 W&R Funds.
Volatility in the equity markets and significant intangibles on its balance sheet has been pulling down its results in the recent quarters. In fact, the company’s balance sheet is the most extravagant among its peers. Consequently, the stock witnessed significant price depreciation in 2011. The stock is trading about 41% below its 52-week high.
However, the stock looks attractive with respect to its valuation. On a P/E basis, Waddell & Reed shares currently trade at 11.9x, a 39% discount to the 19.4x for the industry average. On a price-to-book basis, the shares trade at 4.4x, which is at a 47% premium to the industry average of 3.0x. But the premium on a price-to-book basis looks reasonable given a trailing 12-month ROE of 36.5, which is substantially higher than the industry average of 14.6. Moreover, on a P/CF basis, the stock is trading at 9.2x, a 53% discount to the industry average of 19.6x.
Additionally, the company currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.
Legg Mason Inc. (LM - Free Report) : This company is engaged principally in providing asset management, securities brokerage, investment banking and related financial services to individuals, institutions, corporations and municipalities.
The company has been experiencing significant outflows in its equity and fixed income asset class since 2008. This is weighing down on its assets under management. Also, the current historically low interest rate environment is affecting the yields of money market funds. These negatives kept the stock price of the company under pressure in 2011. The stock is trading about 36% below its 52-week high.
But going by its valuation, we see long-term promises in the stock. On a P/E basis, Legg Mason shares currently trade at 15.0x, a 23% discount to the industry average. On a price-to-book basis, the shares trade at 0.7x, which is at a 77% discount to the industry average. P/CF is currently 10.2x, a 48% discount to the industry average.
Also, the company currently retains a Zacks #2 Rank.
Invesco Ltd. (IVZ - Free Report) : Invesco is a leading independent global investment management company dedicated towards financial security.
The company has been suffering from continuously increasing redemptions and rising operating expenses. A substantial increase in long-term net outflows has hurt investors’ confidence in the stock. The stock is trading about 33% below its 52-week high.
Yet this is an attractive stock if we go by its valuation. On a P/E basis, Invesco shares currently trade at 11.8x, a 39% discount to the industry average. On a price-to-book basis, the shares trade at 1.0x, which is a 67% discount to the industry average. Moreover, on a P/CF basis, the stock is trading at 12.3x, a 37% discount to the industry average. This is also a Zacks #2 Rank company.
Sometimes market sentiment on a particular stock may not revive due to accidental changes. Contrarian strategies can backfire under such circumstances. So, it’s always better to focus on fundamentals before selecting out-of-favor stocks.
Risks notwithstanding, thinking contrarian has a good chance of proving lucrative over the long run. If you’re planning to think outside the box this year, keep two things in mind: be patient and constantly scan for potentials. Above-average returns might soon be in store for you!
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