Clicking on banner ads enables JWR to constantly improve
Jewish World Review July 12, 2001 / 21 Tamuz, 5761

James K. Glassman

Jim Glassman
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Nothing’s arbitrary about the contrarians --
HISTORY’S greatest investors have found lots of different ways to get rich. Warren Buffett likes to become a partner in a great business with a huge and loyal customer base. He’s long been a fan of dominant local newspapers, for example. Benjamin Graham, Buffett’s mentor, used to ignore what businesses actually did, so he could take an unbiased look at the financials. Philip Fisher’s approach was to hit the road and visit companies to take the full measure of management mettle. (Each one is profiled in John Train's excellent book, Money Masters of Our Time.)

Yet all successful investors have, by definition, had one thing in common – they all found a way to identify value before it was recognized by the broader market. To put it another way, all great investors are contrarians. They invest in companies that the market has given up on, or has never really appreciated. Obviously, nobody got rich buying Cisco when the whole world thought it would increase earnings by 50 percent every year. But those who bought Cisco back when most investors still thought it was some kind of food distributor made enormous gains.

The biggest opportunities often arise when a giant has stumbled. After a huge corporation runs into trouble, investors often flee without appreciating how much staying power a major multinational can have. This does not mean that every company whose stock declines is cheap and destined to rebound. Prices can always go lower, and some companies keep stumbling all the way out of business. But markets often overreact to bad news, just as they do to good news.

In fact, buying on bad news can be highly lucrative. The “Dogs of the Dow” strategy, variations of which involve buying the highest-yielding Dow stocks or the firms with the lowest price/earnings ratios in the index, has generated excellent returns. If a company is paying a high dividend, relative to its price, that means that investors don’t have much faith in the company. Basically, the company has to pay them a lot of money each year to hold on to the stock. On the other hand, investors don’t demand a nickel of dividends from Microsoft, because they believe that by reinvesting their money today in new products, Bill Gates will create even more wealth for them in the long term.

Similarly, a low price/earnings, or P/E ratio, says that investors don’t think the company has a very bright future, because they’re not willing to pay much for each dollar of earnings. And when other investors think a company is headed for trouble, that often spells opportunity. For the true contrarians in the tech world,, an excellent personal finance website, recently set out to identify the unpopular but potentially rewarding companies in techland.

“We decided to look for the stocks investors most hate at the moment. The stocks they scorn. The ones they despise,” reports Smartmoney’s Cintra Scott. “We tuned our search engines to find companies that are both beaten down and promising.” That means companies scorned by investors, inexpensive relative to their current earnings, but with histories of strong growth, modest debt, and good prospects for the long term.

You might consider a number of the market pariahs on Smartmoney’s list. Corning (GLW) makes the glass fibers in fiber-optic telecommunications networks. After falling from a 52-week high of $113, the stock has been bouncing around in the $13-$15 range. The telecom sector has been beaten up lately, but this is a world-class supplier of critical components and most analysts see strong worldwide growth in this market over the long term.

Another firm with lots of telecom clients is Dycom Industries (DY), which handles the construction of new networks. At a P/E ratio of about 13, Dycom already has a lot of bad news built into the price of its shares. It’s fallen from $56 down to $22. Any good news in the telecom industry could spark a rally.

Tellabs (TLAB) makes telecommunications hardware for the latest digital networks, and its stock has fallen more than 60 percent from its high. With a P/E around 9, TLAB also looks attractive to those with a contrarian streak.

If the economy rallies soon – and that’s not an unlikely prospect – current prices could look awfully anachronistic. Sure, there are no guarantees; there never are for contrarian investors, but that’s why they make so much money when they’re right.

JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.


06/27/01: Look to Politics to Find Broadband's Market Cap Shortfall
06/22/01: Tech Commodity Buys Available for Mining
06/18/01: The Blackout Portfolio
06/14/01: The conservation myth stars as latest (sub)urban legend
06/07/01: Will America go high tech on the high seas?
06/05/01: 'Price gouging' doesn't cut it as reason for rising energy prices
06/01/01: Authentication tools opening up opportunities in online security
05/25/01: 'Price gouging' doesn’t cut it as reason for rising energy prices
05/21/01: Banking on High-Tech Education
05/17/01: It's No Time to Go Wobbly on Kyoto
05/02/01: Diversify with tech’s leaders
04/26/01: To Revive The New Economy, Release A Chokehold   —   Break Up The Bells
04/24/01: Who’s To Blame For Broadband Crisis? Wired Article Points To Bells
04/19/01: The Bush Budget
04/12/01: To revive The New Economy, release a chokehold --- break up the Bells
04/04/01: Even as stocks have fallen, the Net keeps booming
03/28/01: Where’s The Profit In Biotech Future?
03/22/01: The Joy of Debt: The last thing we should want is a U.S. Treasury flush with cash
03/19/01: 'Defensive' Stocks in the NASDAQ
03/15/01: Bush administration must say no to Jane and Kyoto
03/08/01: Time to buy small caps? Consider these five great techs
03/01/01: Bill’s and Larry’s continued political adventures
02/26/01: Chips on the Dips?
02/23/01: How Tauzin Can Keep His Word And Stop Telecom "Remonopolization"
02/13/01: Consumers, WAKE UP! Middlemen are ripping you off
02/02/01: Publicity-Seeking Politicians and Contingency-Fee Lawyers Corrupt the Law
01/26/01: DoubleClick, eBay And Their Promising Ilk
01/24/01: Will Cyberspace Look Like France or America?
12/27/00: Cut interest, taxes and regulation to save high-tech economy
12/20/00: Close, But No Big Czar
12/15/00: A Down Year? Maybe. But Let’s Put It in Perspective
12/13/00: Clinton’s sorry midnight race into history
12/07/00: Is Telecom’s Future The Bells, The Bells, and Only The Bells?
12/01/00: Money talks and walks in election aftermath
11/29/00: Climate Treaty Deadlock Shows Lack of Consensus and Common Sense
11/23/00: Climate change participants don’t listen to reasons for uncertainty
11/21/00: Will Regulators Create a Recession?
11/14/00: The Election and the Market
10/26/00: Hang on for the long term
10/25/00: On privacy, one size doesn’t fit all
10/24/00: Perish the bearish thought
10/19/00: Beating hunger --- the biggest prize
10/13/00: Way to play biotech
10/12/00: Bush vs. Gore on Technology
10/11/00: Global Climate Scare: Fools Rush In
10/05/00: Avoid the Apple Trap
10/03/00: Goodbye, anti-Microsoft crusader --- and good riddance
09/29/00: Should You Invest in Tech IPOs?
09/27/00: Could technology end airline delays?
09/22/00: Don’t Forget Small Caps
09/20/00: Is the New York Times Rooting for Disaster?
09/13/00: The Best Argument Against Net Regulation
08/30/00: Political Risk in Big Drug Stocks
07/27/00: Tech Dividends
07/25/00: Government Privacy Violators
07/20/00: If I Had to Pick One Tech Stock
07/18/00: Our Favorite Lawsuit
07/13/00: Silicon Valley East
07/11/00: Election 2000: Year of the Investor Class?
07/07/00: Adventures on the
07/06/00:The Difference Between Bill Gates and Larry Ellison
06/29/00: In the Chips
06/27/00: Free market wins in Federal Court!
06/22/00: Wireless Bargains?
06/20/00: Is Your SUV Warming the Planet?
06/15/00: Shopping for Government
06/13/00: Top 10 Tech Stocks
06/08/00: Riding the eBook Wave
06/06/00: "The Last Mile"
06/02/00: Keep Buying!
05/31/00: Who Asked the FTC to Regulate Online Privacy?
05/25/00: "When It’s Time to Sell"
05/23/00: End the "Telephone Tax"
05/16/00: Time Warner Gets a Bad Rap

© 2000, Tech Central Station