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)
Gold Miners – Market Vectors Gold Miners (GDX | B-63)
As many investors are painfully aware by now, gold has been out of favor since the start of 2013. Spot gold prices are now roughly 30 percent below their highs set in the fall of 2011. Along with gold prices, gold-miner stocks have gotten clobbered.
Yet certain strategists see opportunities in the sector.
In April, Axel Merk told us he saw miners “finally getting their act together,” and were now controlling their spending and costs. In early July, Merk reiterated his bullish stance on gold because he thinks that even if interest rates rise, real interest rates won’t be positive.
Another gold bull is famed contrarian investor, Marc Faber, editor of the “Gloom, Boom and Doom Report.” He told us in April that he sees gold prices bottoming out, and he doesn’t see mining shares making new lows, with institutions now seeing the massive value in “depressed” share prices.
GDX is currently the largest and most liquid gold mining ETF by a long shot. For a 0.52 percent expense ratio, GDX holds 41 of the largest gold mining companies from around the world whose shares are listed in the U.S. Top holdings include household names like Goldcorp, Barrick Gold and Newmont Mining. Two-thirds of the fund is weighted in Canadian miners, with U.S. and South African companies making up roughly 20 percent, combined.
GDX is a beast of a fund with $7.8 billion in assets, and trades a whopping $670 million a day at pennywide spreads.
GDX’s total returns since its peak on Sept. 9, 2011: -58 percent (as of July 25, 2014)
Broad Commodities – PowerShares DB Commodity Tracking ETF (DBC | C-26)
There’s a general consensus in the markets that the decade-old commodities bull market is over now that the Federal Reserve is tapering its quantitative easing. Adding to the slowdown in China’s growth, the outlook for commodities might look bleak.
Yet a few strategists aren’t convinced the Federal Reserve will fully taper.
In late March, Peter Schiff, chief executive officer of EuroPacific Capital, told us he already sees the equity bubble deflating, and as the stock market and real estate markets drop, the Fed will be forced to reverse the tapering and launch a new round of stimulus. He thinks most commodities will do well in such an environment, specifically mentioning agriculture, energy and based metals.
Axel Merk is also not convinced the Fed will take a tough stance on its monetary stimulus. He said in early April that based on the weakness in the housing market, he just doesn’t see a clear exit from the stimulus. With central banks around the world focused on growth, he thinks that’s supportive of commodities in general, especially after the sell-off in commodities in May 2013.
For broad, diversified exposure to commodities, DBC is a solid choice and our “Analyst Pick” for the segment. For 88 basis points, the fund tracks an index of 14 different commodities, while capping its energy weighting to 60 percent for more diversification into agriculture, precious metals and base metals.
DBC follows an “optimized” strategy, selecting specific contracts on the futures curve to mitigate any effects of contango.
Structured as a commodities pool, DBC distributes K-1s, as opposed to 1099s for tax reporting. With $5.7 billion in assets and trading more than $28 million a day at pennywide spreads, DBC remains the most popular and liquid option for broad commodities exposure.
DBC’s total returns since its peak on July 4, 2008: -44 percent (as of July 25, 2014)
Charts courtesy of StockCharts.com
At the time this article was written, the author held a long position in GDX. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.