Sometimes it’s worth doing your own analysis, says Keith Richards, portfolio manager at Barrie, Ontario-based Value Trend Wealth Management. It may result in a satisfying contrarian payoff.
At Value Trend, says Mr. Richards, our focus is mostly on the lower-risk positions within the portfolios we manage.
There are occasions, however, where we will add some smaller weighting when we feel a security has the potential for a favorable risk/reward payoff.
That can sometimes involve being a bit of a contrarian investor.
Case in point, we bought CGI Group (TSX–GIB.A) back when this otherwise fine company lost a contract surrounding Obamacare.
Short sellers emerged around the stock, a well-known hedge fund manager (who also happened to be shorting the stock) proclaimed that the stock was doomed, and the headlines were grim.
But our analytics suggested otherwise for this company.
The reasons behind our more optimistic forecasts were threefold: First, the stock, despite a selloff, was holding its long-term trend line.
That told us there was no trend breakdown in the larger picture for the company; despite the pullback at that time, buyers were still willing to step in and support the stock if CGI got “too cheap.”
Next, we examined the downside of losing the Obamacare contract – a deal which represented less than one per cent of CGI’s revenue. In other words, a fairly insignificant amount.
Finally, we felt that the company’s solid reputation would see them through that temporary setback. The company continued to renew established contracts and bring in new business, despite the persistent messages of doom by the short sellers.
As Mark Twain once said, “The rumours of my death have been greatly exaggerated.” We bought the stock.
We’re happy to note that the company has been producing solid quarterly reports since our purchase, leading to a rising stock price. Moreover, we feel that this is just the beginning of the upside for CGI, as the shorts begin to cover their losses. Sometimes, you have to do your own analysis and take on a contrarian position.
Contrarian investing involves a disciplined approach to uncover overlooked or underappreciated stocks or sectors. While it may take a bit more effort to research a contrarian idea, the payoff can be that much more lucrative.
The MoneyLetter, MPL Communications Inc.
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