Contrarian Plays For 2012

By Sham Gad | January 02, 2012 AAA

While the U.S. economy clearly continues to struggle, there are signs that suggest the pace of future economic growth may not be as slow as expected. The job market seems to be behaving a little better than expected, with the unemployment rate falling to 8.6% last month. Housing starts, while still anemic are beginning to show signs of growth again. If those two trends continue to improve in 2012, the year could be very rewarding for contrarian investors. (For related reading, see Can Perpetual Contrarians Profit As Traders?)

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Housing Play
While homebuilder share prices have rallied hard over the past several weeks in response to the favorable signals from the housing market, there may be some safer ways to play a housing recovery, without taking the balance sheet risk posed by many homebuilders. Homebuilder Hovnanian (NYSE:HOV) are down around 3% in the past month and the company sits on over $1.6 billion in debt against around $1.7 billion in total assets.

Instead, a company like Internet network provider Move Inc. (Nasdaq:MOVE) may a better a way to play a housing recovery. Move owns and operates real estate websites that help consumers buy, sell and rent real estate. It's flagship site is a valuable resource for real estate agents and consumers alike. Unlike homebuilders, Move has a pristine balance, with little inventory to speak of. Current assets of over $175 million compare with current liabilities of about $36 million. An increase in housing activity bodes very well for Move, yet investors aren't stuck holding the back with a company mired in debt or over valued inventory. (To learn more, read Economic Indicators: Housing Starts.)

Unlikely Winners
If consumer sentiment continues to improve, Ruth's Hospitality (Nasdaq:RUTH), owner and operator of Ruth Chris Steakhouse restaurants, could be a contrarian winner in 2012. Americans love to dine out, but have pulled back on that luxury since the recession. The combination of more consumer visits and more business diners will improve profitability. Indeed analysts are expecting RUTH to earn 43 cents a share in 2012, up over 25% from 2011 EPS of 34 cents. RUTH shares trade for about $5.22, or approximately 12 times earnings. (For more information, read Investment Valuation Ratios: Introduction.)

Fertilizer giant Mosaic (NYSE:MOS) is likely to be a big winner in 2012. Even thought the fundamentals for fertilizer remain as strong as ever, the market sell off in the second half of 2011 didn't spare Mosaic. The company boasts a pristine balance sheet with over $3 billion in net cash. The company trades for less than nine times earnings and profits will likely head higher from today's levels over the next couple of years, as the demand for corn and wheat from places like China boosts fertilizer prices. Mosaic's valuation is the best among the main industry players.

The Bottom Line
Looking to invest in areas that were abandoned in 2011 is likely to be a rewarding approach in 2012 as long as investors avoid the hard stuff, mainly businesses holding a significant amount of debt. Debt is the evil four letter word in the economy today and contrarian businesses that aren't reliant on excessive debt to fuel their operations, could be standouts in 2012. (For related reading, see Debt Ratios: Overview Of Debt.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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