Contrarian Investing (Part 2) – Investment Manager Examples

Friday, December 11, 2009

37054_people_at_work_3The last two days, I have discussed the concept and importance of contrarian investing. I thought some real life examples would help provide understanding of how it is applied. For today, I have selected four investment managers with whom I have worked that successfully used a contrarian approach.

David Dreman (Dreman Value Management)

Search for “contrarian investing” and David Dreman will pop up. Throughout his career, he has focused on finding bargain priced stocks caused by investor concerns.

In 1987, he was one of our five Liberty All-Star Equity Fund managers when he decided to buy Texaco. This was an unusual situation in which Texaco ran into a legal problem from its acquisition of Getty Oil. Pennzoil, which had already reached an oral agreement to buy Getty, sued Texaco in 1985, getting a $12 billion judgment. An appellate court reduced the amount to $10 billion – still large enough to wipe out Texaco and its shareholders. Then, on Sunday, April 12, 1987, Texaco filed for bankruptcy. Was this a ploy or a last ditch effort? Would Pennzoil negotiate or drag out the bankruptcy, in an attempt to get Texaco and Getty? The investor mood was captured in The New York Times:

TEXACO STOCK PRICE EXPECTED TO SUFFER

Monday, April 13, 1987; Page D-5

Texaco’s Chapter 11 filing will likely cause its stock value to plummet, oil industry specialists predicted yesterday….

Dreman’s evaluation was that Texaco’s resources gave it the ability to prolong the case. And, by going into bankruptcy, Texaco gained additional rights and protections. Therefore, he felt Pennzoil would negotiate a reasonable settlement. His contrarian move proved correct, with the stock bottoming on April 13 – Pennzoil and Texaco signed a $3 billion settlement on December 20, 1987.

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Dreman’s approach is what most people view as classic contrarian investing – rushing in where others fear to go. However, contrarian investing isn’t limited to this “value” investing. The examples below show that all successful investors use it, regardless of their investment style.

Richard Barker (Capital Guardian Trust)

At International Paper in the mid-1970s, Dick Barker was our Capital Guardian portfolio manager for the pension fund. The investment management style was to focus on companies offering potential growth, but selling at attractive prices. This led them to growth companies currently being ignored or disliked by most investors – a contrarian approach.

The example I remember vividly was when Dick bought GEICO in the mid-1970s. At the time, it had been beat down and was viewed negatively in the market. It had almost gone bankrupt.

When Dick bought the shares, my initial reaction was “Yuk!” – an opinion I revised upon reflection because I knew how thorough their company analysis was. Plus, I thought if most investors felt the way I did, and Capital Guardian’s growth forecast was correct, the stock would provide excellent returns. It did.

* * *

Jeffrey Miller (Provident Investment Counsel)

Jeff was our fast growth manager in the Liberty All-Star Equity Fund. While his portfolio was always filled with well-known, fast growing companies, he applied contrarian reasoning to find special opportunities. He looked for companies or trends in their infancy that he felt could become important. Often, at the very beginning, new inventions and ideas look questionable, meaning that stock prices are low compared to the potential opportunity.

The best example I remember is Jeff meeting with us and pulling out this large contraption from his briefcase. It was the first version of a cell phone. It looked silly: large, heavy and expensive – even 800 number calls cost money! Jeff said, “I’m not sure how people will use this or why, but I’m sure it will catch fire.” Obviously, he was right.

* * *

Glen Bickerstaff (TCW Group)

TCW was one of the Vantagepoint Growth Fund managers in the late 1990s/early 2000s. He bought successful high growth companies, but with a unique contrarian twist.

Glen found that most analysts had trouble forecasting sustainable rapid growth. Rather, their models had a natural slowing in the growth rate. Glen felt that, while that might be appropriate for a single product, a company could maintain its growth through as yet unknown product development and corporate strategies (an example today would be Apple). Thus, he sought out “bargains” where he believed management and market opportunity could produce “unexpected” rapid growth. His portfolio was loaded with companies like AOL that continually surprised analysts with their ability to keep up their growth rates.

* * *

I hope these examples give you an idea as to how investment managers use contrarian investing, regardless of their investment style. Monday, I will give you some of my own personal examples.

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