Today's Worst Performers, Tomorrow's Winners?

One key element of achieving successful investment results is to have a contrarian approach. It's an approach that ignores the crowd and requires the conviction to be comfortable being alone if necessary with respect to investment decisions. One easy way to find contrarian ideas is to examine stocks with the worst performance.

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Simple to Do, But Not Easy to Execute
Finding stocks hated by the masses is not a hard task. Just look at 52-week low lists and in minutes you will have a search list. Successful execution on the other hand, is not easy and requires effort. Being a contrarian also requires respect for the fact that the masses may be right. Many of the worst-performing stocks for one reason or another deserve to be there unless a significant change is expected to occur.

While the future for solar power looks promising, names like Evergreen Solar (Nasdaq:ESLR) are neither cheap nor contrarian investments. Net losses are increasing and the company generates no free cash flow. The market cap of $160 million is dwarfed by over $300 million in debt. Even First Solar (Nasdaq:FSLR), the giant in the industry which is profitable and has no net debt, trades at nearly four times book value. Shares have declined significantly in recent months as investors realized the valuation may be just too much based on current future prospects.

On the Other Hand
At the same time, you have names like fertilizer company CF Industries (NYSE:CF), which has declined significantly in recent months due to the company's acquisition of Terra Industries earlier this year. The entire fertilizer space has been hammered recently but more so for CF because it arguably paid a full price to wrestle Terra away from Norway's Yara International. Even so, the long-term outlook for fertilizer looks very promising and CF trades at under nine times forward earnings. It's a $4.8 billion market cap company that has earned nearly $1.5 billion in combined free cash flow over the past three years. It will earn much more as the industry cycle for fertilizer prices continues to improve.

Stein Mart (Nasdaq:SMRT) is a retailer of discounted brand name fashions. The company's shares have fallen out of favor due to expenses related to stores closing that hurt earnings in 2009. Yet these charges should be nonrecurring and frugal consumers have been visiting places like Stein Mart and TJX Companies'(NYSE:TJX) TJ Max for name brand goods at discount prices. Stein Mart trades for 14 times earnings, has a market cap of $300 million and net cash of over $80 million.

Today's Ideas, Tomorrow's Winners
There's no guarantee that a contrarian investment in a statistically cheap unloved stock will lead to successful results. But looking in this pool of investment ideas is likely to produce more compelling opportunities than cocktail party stocks. (Learn more: Buy When There's Blood In The Streets.)

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