The Contrarian Special: 3 Unloved Sectors That I'm Buying Into
Mar 29th 2012 10:26AM
Updated Mar 29th 2012 4:56PM
"Be fearful when others are greedy, and be greedy when others are fearful."
-- Warren Buffett
If you couldn't tell, I'm no fan of following the crowd, and that's been true of my life both in and outside of the stock market.
Speaking strictly of investments, I do most of my buying when people want nothing to do with a sector and tend to sell when investors can't seem to get enough. There are notable exceptions to this rule, of course. The housing sector, for example, is unloved, yet there's no way I'd get within throwing distance of any homebuilding stocks right now. But, in general, Warren Buffett's truism to buy when others are fearful holds... well, true.
Today, I want to share with you three unloved sectors that I've either begun buying into or plan to buy into in the not-so-distant future.
Coal stocks simply can't catch a break. Decade-low natural gas prices are causing electric utilities to switch to natural gas-powered plants to generate electricity. In addition, flooding in Australia, unfavorable coal pricing, and a manufacturing slowdown in China are crunching margins and forcing mine closures in the wake of weaker demand. In January, Patriot Coal (NYS: PCX) announced that it would shutter mines in order to conserve costs and bring supply in line with demand.
Although there are multiple companies in this sector that appeal to me, my eye remains on Arch Coal (NYS: ACI) . Of the factors mentioned above, low natural gas pricing and a slowdown of exports to China are the greatest threats to its growth, but I'm having trouble ignoring its bargain-basement valuation here. Arch is trading at just nine times forward earnings and 68% of book value, though I am fully aware that there's a built-in risk that EPS estimates could fall further. Arch is also yielding 3.9%, which is one of the highest marks in the sector. I haven't seen anything that would suggest China's manufacturing downturn is slowing, which is what has kept me from diving into Arch, but I assure you my swan dive into the stock isn't too far off.
Junior gold miners
I'm not exactly sure when this happened, but gold miners of all forms, big and small, became great value plays almost overnight. There has been a major disconnect between the price of gold and the performance of the miners for quite some time, but the values I'm witnessing throughout the sector are just unsustainable to me. Either gold needs to fall $400 per ounce or gold miners need to correct upwards to match the yellow metal's current spot price.
This is a sector that I've been inching into over the past year and plan to be more aggressive with over the coming months if valuations don't improve. I already own two junior miners in Golden Star Resources and Claude Resources (ASE: CGR) , and I may as well include Thompson Creek Metals (NYS: TC) in there as well, since its Mount Milligan project is just as much a play on gold as it is on copper.
Even though I've held onto Golden Star the longest of these three, it's Claude Resources that has me the most excited. Claude recently boosted inferred mineral resource levels at its Seabee mine by a clean 236%, which would give it approximately 1.3 million ounces of gold in the ground -- assuming its calculations are correct, of course. The big hurdles for Claude are finding ways to increase production beyond the roughly 50,000 ounces it plans to produce in 2012 and proving that its Madsen mine is another mother lode of reserves. With a handful of gold miners trading at single-digit forward P/Es, it's small Canadian miner Claude Resources that stands out to me.
Telecom equipment providers' inclusion here may come as a surprise to you, as they haven't performed as miserably as coal or gold miners, but most haven't kept up with the rise in the S&P 500, either. Long before AT&T and Verizon made it clear they would be beefing up their capital expenditures in 2012, I made a beeline for the fiber optic sector.
We've all heard the argument before that as the business world transitions from paper to digital, the amount of bandwidth needed to support this data would need to increase. Buying into fiber optic components suppliers is my way of getting ahead of the curve on this trade. Speculators in 1999 through 2001 attempted to do the same thing long before there were actual earnings in this sector, and they were burned badly. Now that there are tangible profits to be had, I happen to adore fiber optic companies.
Micro cap Alliance Fiber Optic Products, a manufacturer of connectivity products for the optics sector, has been a core holding of mine for quite some time. Oplink Communications (NAS: OPLK) , a "Small Cap to Rule Them All" pick that I highlighted last May, is also on my radar. Oplink is profitable, with $174 million in cash and an enterprise value of just $159 million. That places its enterprise value at just 6.7 times trailing 12-month EBITDA, which is dirt cheap by my standards.
I've said it before, and I'll say it again: Sometimes it's smart to play the contrarian. I may not always be getting the best possible price for my purchase (which is fine, as market timing is impossible), but these sectors present opportunities that seem like no-brainers to me over the long term.
What do you think: Am I smart, crazy, or a little bit of both? Tell me about it in the comments section below and consider adding these stocks to your free and personalized watchlist.
At the time this article was published Fool contributor Sean Williams owns shares of Golden Star Resources, Claude Resources, Thompson Creek Metals, and Alliance Fiber Optic Products, but he has no material interest in any other companies mentioned in this article. He enjoys playing the contrarian. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that believes transparency comes first.
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