If you are a beginning investor that is trying to form an investing style, then this article is for you. An investing style is like a fingerprint; everyone has a different method of thinking about the market. One style that I find to very appealing is contrarian investing. This type of investing strategy looks to profit off of overreactions in the market by going against the crowd and buying a stock that has been going down or shorting a stock that has been soaring. Since you are a beginner, most of your trades will be to the long side, so I’ll focus on that.
The first point to remember is that you can’t just buy stocks that have been beaten up. There are 2 important reasons for you to buy a stock: value and price. If the company has a failing business, then you want to stay away from it. This is obviously very complex. It is the art form that must be mastered in order to make consistent profitable trades. It is easy to tell which stocks are having a tough time; it is difficult to spot the turnaround opportunities.
The key question that I like to ask in order to tell whether the company is just suffering short term losses or is in a long term tailspin is whether the issues are transitory. Are the issues something that can change or are they impossible to overcome? Are there catalysts that can change the situation? Has the company said that it missed earnings because it is investing its profits in order to gain in the long term? If there is a clear path to regaining profitable growth and the issues are short term than the firm is worthy of investing in. Even though you are taught in business school that companies are priced perfectly, the fact of the matter is that stocks are often mispriced in the short term which allows you to make outstanding profits in the long term.
Investing is as much about number crunching as it is about having the proper mindset. The numbers are used to back up your feelings in a stock which allows you to have high conviction in it. Let’s go over an example from the past which highlights this exact line of thinking. Then I will show you an opportunity that I see in today’s market that we can look at to profit from using this method of analyzing stocks.
In May of this year I recommended Twitter stock because of the unrelenting negativity surrounding it. Its business seemed to be universally mocked among investors. It seemed that it was always featured on CNBC.com showing how much it was going down. Investing should be based on numbers, not on emotion. Hatred for a company is an emotion that can lead to the stock being under-priced. For those inexperienced investors, this is known as sentiment. Sentiment can be measured in investor polls or by simply listening to and watching the tone in which the media is reporting on a story. Now, with the advent of social media, you can even read the comments on articles to see what some small investors are thinking. You may say that this way of thinking lacks rigor, but the proof is in the pudding. I recommended Twitter in an article on June 12th when it was at $36 and it ended up peaking on October 8th at $55. June 12th is just when I released the article, I was recommending it to all my friends when it was at $30 in May.
Let me leave you with a stock recommendation that uses this method of thinking so you can see it in action. The company that I will be discussing is SeaWorld. I will be doing a more in depth article on the company next week. The basic premise for me to start looking at SEAS stock stems from the movie “Blackfish”. This movie showed the harmful environment that the orcas have been put in which may have lead to one of the workers at SeaWorld. It made the company look very bad and has lead to the CEO actually being fired last week because of the negative traffic trends that have resulted from the movie. As a contrarian investor I look at this as a potential opportunity. The stock is down from the mid 30s earlier this year to $17 per share, where it currently trades at. The hatred that this company receives is palpable. If you click on any article about the firm you will see environmentalists seething with hatred predicting its bankruptcy. I believe that with a positive marketing campaign SeaWorld can make the effects of the movie evaporate. The fact of the matter is that it actually has saved 23,000 sea animals since its founding. With good leadership I believe that the firm can convince the non-environmentalists to come back to the parks and spend money. The market is only looking at the near term negative sales results and not seeing the potential turnaround.
That was a look at how you can go from thinking like everyone in the crowd, to actually being ahead of the game and making huge profits. If you liked this article, subscribe to me on seeking alpha by clicking right here! It’s free!