Imagine if you had played the contrarian and picked up blue chips in the Crash of 1987, or Amazon.com (AMZN) and Apple (AAPL) during the tech collapse of 10 years ago, or a barrel of oil at $10 when Russia defaulted in 1998. You probably imagine it all the time.
Those bets paid off big, and with such scores in mind, investors watching Europe wrestle with its financial crisis might be tempted to hunt for bargains there. “The performance of European equities is being driven by headlines and sentiment,” says Patricia Oey, an analyst with fund research company Morningstar, rather than any sober evaluation of company fundamentals. Sarah Ketterer, chief executive officer of Causeway Capital Management in Los Angeles, is finding values in Europe among high-dividend-yielding multinationals. She likes Siemens of Germany and Spanish power plant and airport builder Técnicas Reunidas because they derive a large share of their revenue from faster-growing emerging markets and have healthy balance sheets. “Financial strength has become especially important in Europe as bank credit will become increasingly difficult to obtain,” she says.
An indirect way to benefit from a Euro-bounce, say Oey and Tom Graves, an equity analyst with S&P Capital IQ, is via cash-rich U.S. multinationals. They should get a boost if Europe’s growth picks up, yet are globally diversified enough to stay profitable if it doesn’t. Oey recommends Vanguard’s Dividend Appreciation ETF (VIG), while Graves favors Vanguard’s High-Dividend-Yield ETF (VYM). Both hold such stocks as McDonald’s (MCD), Chevron (CVX), Microsoft (MSFT), and Coca-Cola (KO).
In the U.S., bank stocks are deeply unloved. The KBW Bank Index is down 27.4 percent this year through Oct. 25, compared with a loss of 2.3 percent for the Standard & Poor’s 500-stock index. One stockpicker who thinks this is an overreaction—and is staking his reputation on profiting from it—is Bruce Berkowitz, manager of the Fairholme Fund (FAIRX). Since 2001, Fairholme has outperformed the S&P 500 by an average of 14 percent annually. So far this year the $9 billion portfolio is down 26 percent, hurt by its stakes in Bank of America (BAC) and Goldman Sachs (GS). Berkowitz says he’s sticking with the stocks, as well as with AIG (AIG) and Citigroup (C). A reason for his faith, he says, is that Washington has already shown that it will not let them fail. “These are the systemically important financial institutions, not just to the U.S., but to the world,” he says. “And they’re priced for death and disaster.”
Jenny van Leeuwen Harrington, CEO of Gilman Hill Asset Management in Westport, Conn., has her own way of being contrarian when making investments for clients. “You want to be looking in the weeds for the smaller companies that are completely out of the spotlight,” she says. That approach has led her to stocks that provide a lot of income, such as master limited partnerships and real estate investment trusts. One of her top holdings is Tulsa-based Magellan Midstream Partners (MMP), a master-limited partnership that owns a 9,600-mile petroleum-products pipeline. MLPs are private partnerships that pass cash flows to shareholders in tax-deferred distributions. Magellan Midstream yields 5 percent. “They have extraordinarily consistent revenues and little to no exposure to commodity prices,” says van Leeuwen Harrington.
She also owns shares in National Retail Properties, a real estate investment trust that owns buildings ranging from convenience stores to movie theaters. It boasts occupancy levels that have remained at nearly 97 percent throughout the weak economy, as well as 22 straight years of dividend increases. Such stocks “won’t keep up in a strong market because they have limited growth potential,” she says, “but are a great ballast to a portfolio with consistent dividends.”