Contrary Opinion and How it Can Help You Today
Middleby (MIDD) and Why It Jumped
AerCap (AER)
Everyone knows that you should buy when stocks are down and sell when stocks are up.
But it’s devilishly difficult to do so.
When stocks are down, most people don’t want to buy. They’re afraid stocks are going lower. They’re afraid business conditions are getting worse. And they’re afraid of losing money!
When stocks are up, contrarily, people don’t want to sell. They believe stocks are going higher. They believe business conditions are getting better. And they’re afraid of missing out on the next move higher.
So how do you train yourself to buy when stocks are down?
And how do you train yourself to sell when stocks are up?
One way is to use technical indicators, like moving averages, which speak after the turning point but generally keep you invested for the majority of a long bull market.
An equally valuable tool is Contrary Opinion, which has long been recognized as effective, but—by its nature—can never be a mainstream strategy.
Contrary Opinion, at its core, maintains that when everyone thinks alike, everyone is likely to be wrong.
Contrary Opinion works because, as humans who naturally gather in social groups, we feel most comfortable when we reinforce each other’s opinions.
But as the reinforcements of others grow, we lose our ability to think critically and rationally; we transform from individual thinkers to part of a crowd. And crowds are notorious for becoming irrational, which means they are good at taking trends to extremes.
Now, there are many times when Contrary Opinion is useless, just as there are many times when overbought-oversold indicators are useless. As investment tools, these tools cannot be applied on a daily basis.
For instance, in the middle of a bull market, you might observe that people are getting more bullish. While that might be reason to be a little more attentive to the level of bullishness, by itself, it is not reason for concern. What you want to identify is the point of maximum bullishness.
And the converse is true in bear markets. Just because many people are scared doesn’t mean a bear market must end; you need to identify the point of maximum fear to be confident that the bottom has been attained.
So Contrary Opinion must be used judiciously.
But when its observations are supported by the signals of other indicators, the results can be astounding!
A little over five years ago, for example, people all over the U.S. were downright gloomy about the future.
We had just had the greatest financial shock of our lifetimes, the greatest since the Great Depression. The housing industry had imploded, along with the financial system that supported it. Lehman Brothers was dead. Banks were afraid to lend to anyone who actually needed money. Unemployment was soaring, auto manufacturers were crying, and fear was widespread.
The mere idea of investing money in the stock market was absolutely horrifying to most people.
But Cabot’s market-timing indicators turned positive in March 2009, signaling the start of a great bull market.
And that’s worked out very well!
In fact, since then, the Dow has gained 124%, the S&P has gained 150%, and the Nasdaq has gained 197%.
Thus, buying after the point of maximum pessimism, supported by technical indicators, worked out very well.
And what about today’s climate?
Today the housing industry is healthy, banks are happy, auto manufacturers are happy, and the unemployment situation is much improved, though we still have a problem finding good-paying jobs for the young and unskilled.
Also, the sentiment of investors over the past five years has shifted from fearful to optimistic. I don’t think it’s euphoric yet, but there are definitely signs that risk is an increasingly smaller consideration when it comes to investing—which means risk is increasing!
Also, the IPO business is booming, while mergers and acquisitions are heating up. Money is loose.
In short, the fundamental news is quite good, and sentiment is on the cheery side.
At the same time, however, the bull market is showing signs of tiring.
With fewer true bargains, power has now shifted to the momentum players, who chase high-profile leaders like Apple (AAPL) and Netflix (NFLX) and Keurig Green Mountain Coffee (GMCR).
In short, breadth is narrowing, as investors concentrate on an increasingly small number of leaders.
Eventually, if this market plays out true to form, those leaders will roll over, and the bull market will be finished.
But it’s not over yet. In fact, for people who like to play momentum stocks, a market like this can be extremely profitable.
But if you don’t want that risk, it’s now advisable to stick to lower-risk investments.
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For example, four weeks ago, noting the growing risk in the market, I purposefully recommended a very low risk stock, Middleby (MIDD), for my Cabot Stock of the Month subscribers.
It was a good value, according to Roy Ward, our chief value guru and the brains behind Cabot Benjamin Graham Value Investor.
It had a good story; the company leads the restaurant equipment business in the U.S, serving 97 of the top 100 food chains with 45 brands of cookers, fryers, mixers, etc. And with the purchase of Viking earlier this year, it’s moving into the residential kitchen business.
And technically, the stock looked to me like it had bottomed out and was ready to start climbing—someday.
Well, I didn’t have to wait long!
A week later, the company released a second-quarter report that caught the analysts napping, and by the end of the day, it was up 15%
And it kept climbing; now it’s up 18%!
But Roy doesn’t recommend buying MIDD here because it’s no longer undervalued. And I have to agree with his conclusion; that stock could easily pull back to 80.
So what can you buy today?
Well, one no-brainer would be to take your own subscription to Cabot Benjamin Graham Value Investor to see what Roy is recommending now.
Roy crunches a ton of numbers every month to find undervalued high-quality investment opportunities, and his results have been superb.
In fact, in the 11 years Roy has been helming Cabot Benjamin Graham Value Investor, his Cabot Value Model has gained 241.7%, dwarfing the returns of the Dow (up 110.4%) and the S&P 500 (up 75.8%).
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Alternatively, you can try to jump on one of those momentum stocks, hoping you won’t be bucked off when the going gets rough.
For example, it’s no secret that airline stocks are doing well in this improving economy. JetBlue (JBLU), Southwest (LUV) and Spirit Airlines (SAVE)are all flying high (I couldn’t resist).
The trouble with airline stocks, however, is that they can turn cold in the blink of an eye.
So I think your odds are better in a stock like AerCap Holdings (AER), which is still benefiting from the same industry trends but might not see such an exodus when the going gets rough, simply because it’s less well known and thus owned by savvier investors.
AerCap is the world’s largest aircraft leasing company, with more than 1,700 aircraft leased to more than 200 customers in more than 90 countries.
Headquartered in the Netherlands, the company is truly a global business, with 22% of revenues coming from Europe, 17% from the U.S., 11% from South America, 10% from Russia, 8% from China and 32% from elsewhere.
And AerCap has just gotten larger, with the $7.6 acquisition of International Lease Finance Corporation (ILFC), the last major asset to be sold by American International Group.
This acquisition gains the company ILFC’s $21 billion backlog, full of 787 Dreamliners and Airbus 350s at below-market prices, so if the industry remains healthy, this could work out really well.
So you could just run out and buy AER here.
But I don’t recommend it, simply because technically, this is not a prime setup. If you want today’s prime setups, the best place to get them is Cabot Top Ten Trader,which every Monday recommends 10 stocks that are ready to run.
Cabot Top Ten Trader first recommended AerCap (AER) on Feb 24 of this year when it was trading at 42. Today it’s at 49. Tomorrow, who knows?
So take a look at Cabot Top Ten Trader and try to get in on the next AerCap!
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For every stock recommended in Cabot Top Ten Trader, Mike Cintolo gives a precise buy range, as well as a stop loss for controlling risk. So while you might get lucky doing it on your own, your odds are better if you follow Mike.
P.S.—To get more great investing ideas like this one, sign up for email delivery of our free Cabot Wealth Advisory. Get stock tips, stories, and investment ideas delivered right to your inbox!
