Don’t Gamble – Invest In Contrarian Value

The wisdom of crowds is a dangerous thing – at least when it comes to the market. If you’ve read the book by James Surowiecki, you’ll know that he argues that the aggregation of information in groups, results in decisions that, he argues, are often better than could have been made by any single member of the group. This may be true in some instances, but I’ve found it to be completely untrue when it comes to the market.

A case in point is the current market situation.

The amount of people, and investors calling for their peers to “leave the market” and go “all cash” has become the roar of the crowd, to a place where it’s hard to tell “how bad” things actually are, what impacts things will have, and how companies will come out on the other side in 1-3 years or so.

How their ability to reward shareholders or keep their current operations and margins going is actually going to be affected, as it were.

It’s easy to be a permanent bull in a rising market – just as easy as it is to be a permanent bear in a market that’s going south.

I don’t consider either approach to be fruitful, or for lack of a better term, “correct”.

The market is storming – Strategies

It’s completely natural to feel at a bit of a loss when the market starts to turn to chaos. Watching what was only weeks ago green numbers turn to red forces people, humans, and investors into considering what to do.

It’s the same logic as when we take a wound. We want to do something – anything – in the hope that doing something at least makes it temporarily better. This is quite often the wrong choice though – and when you look at the market in a situation like this, investors are left with only two choices at the extreme ends.

Leave or stay.

The fear of extreme losses is a powerful motivator, even if the motivation is in the wrong direction. It can, and does make it extremely tempting to sell of investments you’ve made less than 2-24 months ago with the intention of holding until judgment day.

However, just like mismanaging an injury, recklessly jumping into action with your investments may in the end cause you more harm than it does good. There are a couple of very “basic” tenets and logical perspectives that you should never forget. Ever.

1. You have goals. Focus on those goals.

For me, those goals are primarily related to value and dividends. Are my dividends safe and fine? Am I invested in cheap equities with long-term appeal and safe fundamentals? If the answer to these questions is “Yes”, then I move on.

Focusing on your goals ensures that you’re less distracted by noise and events.

2. The market has a history – and this has happened before.

You’re not the first investor to face this – nor will you be the last. The world has seen plenty of market shocks – world wars, recessions, and the like. Given enough time, things always reverse, and they typically do so even stronger than before.

3. Investing your money is better than leaving it in cash

In a world where inflation is closing at 8%, having any amount of cash you don’t need for your immediate expenses is potentially a loss-making strategy. The individual intricacies of how much of your net worth should be cash is something I leave to each person, because it’s a very individual thing depending on your status, family, living situation, health, and income.

What I can say is that I keep less than 4% in cash, and I continually reinvest over 80% of what income I get. Savers typically lose monetary value in “real terms”, while investors typically, and long-term outperform people that leave things in cash.

Remember, some people have been calling for “all cash” since 2013-2014, popping up like Punxsutawney Phil from “Groundhog Day” whenever there’s a downturn. Those people, if following their own advice, would have missed appreciation well over 100% in the name of what they perceive to be overvaluation.

4. Diversification

I invest in a myriad of different investments, sectors, and overall categories. None of my investments represent more than 6% of my total portfolio value. This way, I stay as diversified as I deem necessary to handle my risk. How you diversify is up to you, of course – but diversification in itself is an important tenet of successful financial management.

Focus on what you can control…

As you can probably tell from these points, I’m not a market timer. I don’t focus on what I can’t control. No one can control the market. Of course, we all instinctively want big gains without having to face losses in our investments.

But in trying to avoid those feared losses, those red 10-25%, you may decide not to invest your money at all, trying to wait for a time when things “feel right”. Well, trying to avoid the theoretical pain of that potential loss, you may end up with uninvested capital providing negative returns. Such behavior usually has negative consequences.

Rather than trying to time the market, I base my investment strategy on a few major assumptions, strategies, and realities that I view as a “core” of how I approach things.

Value, Fundamentals & Contrarianism.

If we buy a “good” company at a “good price”, while it’s being undervalued, then the result is usually, over the longer term, that the company or the investment goes up. That means that our investment usually outperforms not only the market but other similar companies as well.

I’ve found that by adopting a contrarian mentality, i.e., doing what others are not doing, I’ve done pretty well for myself. Everyone was saying “Buy tech/crypto/growth companies”. I didn’t buy a single one, and as a result, I’ve outperformed markets handily YTD, still being in the green while most are red. Most people were saying conservative DGR stocks were going down – and I mostly invested in companies just like that, but at cheap prices.

Now everyone is calling for investors to leave the market because the sky is apparently falling.

So what am I doing?

Well, I’m certainly not leaving the market.

I’m doubling down on my tenets – value and fundamentals – making sure to get a “good deal” with a good yield because I want interest for the money I invest beyond returns in capital appreciation.

Even if the market were to continue down for a month, 3 months, or a year, it really wouldn’t bother me in the least. First, no one can really, accurately forecast that because no one has that crystal ball.

But my point here is that I still get my dividends paid because the companies I invest in have no plans to adjust these, and their margins and profits, even calculated for impacts, are good enough to keep paying me. Eventually, things will turn back up again.

Until that time, I’m fine if the markets want to have a bit of a fit and de-value my original investment for some time. I invest money because I don’t want the money elsewhere – so if that investment goes down for a year before going up after 2-3, that’s something I’m okay with, as long as the valuation remains solid and we’re not looking down the sights at overvaluation – or, in a worst-case, a company that has a potential to de-stabilize fundamentally.

…and remember why you do what you do

Most of all, I’ve found it useful to remember your end goals with your investments. If your goal is to have a static pile of money accessible at any time – then you probably shouldn’t be investing your money in the market, as the market does move up and down with surprising volatility from time to time.

If you, however, have a plan of seeing your invested capital grow over time, step by step, and continually reinvesting proceeds to generate an ever-growing stream of income and wealth, both in the form of dividends as well as value (capital appreciation), then you’re generally well-served by the market.

Yes, in times like these, we do need to remind ourselves that the market goes two ways – up and down – and predicting them with exactness is impossible.

But the fact that if you invest conservatively, you will continue to harvest your dividends, should be of some solace to you. Because what does it matter if a company that you “know” is great, undervalued and appreciating, trades below where it “should” for a year, or three, or five? You don’t plan to sell your holdings anyway, which makes the point moot.

All it enables you to do is put more capital to work at great financial multiples – which is our plan in any market. Sure, it’s great to see “green” more than “red” – but I’ve seen red before. I’ll see it again – and the only reason it would bother me is if I’ve been buying things at multiples that were really “too expensive”.

With some exceptions that I’m tracking, I think I’ve deployed most of my 2022 capital in quality businesses at cheap multiples – even considering the latest drawdowns – so far.

Can I name some examples?

Yes, I can.

Contrarian Value Investing – 3 examples

I’m not going to mention the 10 companies I wrote about in this article.

Instead, I’m going to focus on 5 other opportunities with a 100% 2-4 year upside, as I see it.

1. Vicat (OTC:VVCTY)

I haven’t yet covered this company as extensively as I’d like – but I’ve been studying and working on it. Vicat is the most undervalued concrete/cement player on the entire planet – at least among the publically listed and European businesses.

This company has an impressive 15-year dividend growth/no cut record. Despite being smaller than both Holcim (HCMLY) and HeidelbergCement (OTCPK:HDELY), which I am longer in, this smaller French company has more valuation-related upside.

The crucial differentiator between Vicat and these peers, that make it better? Well, aside from proving its resilience during COVID-19, we’re talking about Carbon rights. Heidelberg and Holcim are at their mercy starting now, but Vicat is Carbon rights long all the way until 2030.

That will allow the company to eke out high-margin concrete profits for years longer than will its competitors. Yes, it has its disadvantages. Its dividend is fixed, and it has limited geographical diversification – but the upside is undeniable and significant.

A mixed valuation perspective gives Vicat an upside of at least 70% to a price of €45/share or above, with over 100% over the next few years given the company’s 7-9% 2022E-2024E EPS growth forecast.

Vicat is a “BUY” here – a deeply contrarian and value-based one with a high yield of over 6% for concrete.

2. KION Group (KIGRY)

I recently wrote about the KION Group in our private marketplace – so this is just going to be a short description. KION has been selling off like most companies despite the significant advantages of the company we’re seeing here. For those of you that don’t know KION, it’s a company in the materials handling sector. It develops, manufactures, and sells intralogistics, warehouse automation equipment, and industrial (forklift) trucks.

The company’s advantages – are expertise, being among the market leaders, and trading at what is an extremely cheap valuation.

The downsides? Input cost inflation, expected headwinds in 2022 resulting in a 10-18% YoY EPS drop, followed by a 30-40% growth in 2023 if it turns out to be accurate.

This is a long play, dear readers – but it’s the epitome of a contrarian value play. Its market position is close to unassailable, and even in the case of a 2022 weakness, the turnaround if valued fairly, will be in the triple digits.

I’ve started loading shares – and will keep doing so.

KION Group is a “BUY”.

3. Colruyt (OTCPK:CUYTY)

My third example of this is a grocer – a Belgian grocer known as Colruyt. I just recently published a piece that delves deep into the company. The advantages are clear – conservative operations relying on recession-resistant grocery operations, with almost inflation-indexed incomes.

The company is a Belgian market leader with over 30% market share. Furthermore, the company’s operational efficiency numbers absolutely speak for themselves. Its negligible net debt level also gives it tremendous fundamental safety as we move into higher interest rates.

Again – all of these companies may, or may not, go lower. Maybe even significantly lower. But investing in a Belgian market leader, a European grocer that services tens of millions of people?

Not something that’s that big a risk for us. Let other investors take the risk – we’re happy with 50-100% in 1-4 years.

And at this valuation, with a price target of over €40/share, this company has an upside like that.

Let people buy their food – and earn your 3%+ yield plus expansive capital appreciation over a long time.

Wrapping up

So, I’ve given you a small insight into my thinking and how I go about picking my stocks. This way has delivered alpha for me for years. It’s what convinced me, many years ago, to abandon investing in index funds or products and go my own way. Like many analysts, investors, and business people, my thinking was “I can do it better”. And I have – for now.

Some think this time marks a change, and companies such as the ones I’ve mentioned won’t go up – for a long time.

They would tell you that the time has come to invest in things like energy, natural gas, coal, crude, midstream, and the like. I say that the time to invest in such companies is mostly over from a valuation perspective. Oh, there’s some upside left to some of them – but most of them have started dipping already, and news is out that energy is dropping. Now, I believe that we’ll be seeing a paradigm shift in energy, with gas remaining expensive and crude remaining elevated – but perhaps not growing much from beyond this.

Because look – this has happened before. In -08, oil was at similar highs – and then it dropped back down to $60. I’m not saying it’s exactly the same. What I am saying is:

Look at valuations.

The time to go for most energy stocks was a year ago. I missed it. Many value investors missed it. Oh, I invested a few percent here, some there, and ended up with a 6-7% portfolio allocation that grew nicely. But I could, and should have gone deeper.

Now, however, is the time to look at what is undervalued. Stick to your strategy. And don’t let short-term market movements dictate your fears and your strategies.

Keep looking at the big picture.

Keep true to your strategy.

Act on it.

Thank you for reading.