Sometimes betting against the crowd can be the greatest wisdom.
Being a contrarian investor is not for the faint of heart. Trying to make a quick swing trade by picking the bottom on a hated sector or theme can prove disastrous.
Yet for those with a long-term view and a strategy based on patience, contrarian plays can sometimes reap the biggest rewards.
I’ve always been interested in out-of-favor, or hated, markets, simply because when sentiment turns so negative, associated stocks sometimes become incredibly “cheap” as investors shun them. There’s something appealing to me about going against the herd from an investment perspective.
Last week, I pointed out the top three macro themes from our Alpha Think Tank strategists. This week, I’m going to point out three contrarian themes that some of our strategists highlighted, and the associated ETFs that track those contrarian ideas.
Coal is Dennis Gartman’s No. 1 contrarian play. While Gartman tends to be more trading-focused, he told us in mid-May that coal is his top long-term investment play.
Gartman notes that everybody hates coal at the moment, and that coal stocks are down 90-95 percent from their highs only a few years ago.
He’s right that coal might be one of the most hated sectors at the moment. There’s now a glut of “cleaner” burning natural gas due to new “fracking” technologies. The Obama administration’s plan to limit carbon emissions also doesn’t bode well for the industry.
Still, Gartman highlighted the importance of coal for electrical generation around the world, which he doesn’t think will change anytime soon. According to the U.S. Energy Information Administration, coal was responsible for 39 percent of U.S. electricity generation in 2013.
I also wonder if coal companies will eventually find a way to survive and thrive, through new carbon capture methods, or through implementing clean-coal technologies.
KOL is currently the only coal ETF available. The cap-weighted fund casts a wide net over the entire coal industry, both in terms of sectors and geography, capturing 35 companies from around the globe engaged in the coal industry.
The U.S. makes up the lion’s share of its weighting at 40 percent, but Chinese, Indonesian and Australian coal companies also comprise a significant chunk of the fund. KOL has decent liquidity, with $166 million in assets and trading $1.6 million a day at 3 cent spreads.
KOL’s total returns since its peak on June 20, 2008: -64 percent (as of July 25, 2014)