Being a contrarian investors has paid off big so far in 2012. Some of the most hated companies in 2011 have been the biggest investor darlings in 2012, with returns that have vastly outperformed the S&P 500.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Run For Cover
According to Bloomberg, the 26 most heavily shorted companies in the S&P 500 have climbed nearly 20% this year, more than double the 8% return turned by the S&P 500. Thanks to an economy that is gaining momentum and investors looking for value in all possible corners, the short trade has been burned. As short sellers run to cover their positions, the additional buying adds a stronger tailwind to the share price advance.
For retailer Sears Holding (Nasdaq:SHLD), the struggling retailer run by Eddie Lampert, over 30% of the available float was in the hands of short sellers as of Jan. 31, 2012. Earlier this year, SHLD shares fell to $30 as poor operating performance sent investors running for the exits and short sellers doubling down. At the time, Sears, with a lot of valuable real estate, was trading for a fraction of stated book value of $71 a share. So far in 2012, Sears is up over 70%, although still down significantly from $94 a share it fetched in 2011. (For related reading, see S&P 500 Expected To Pay Record Dividends In 2012.)
Netflix was another badly burned stock in 2011, as a management mishap led to subscriber loss and a share price that nosedived from $300 to $70. The shorts piled in and Netflix later reported a solid quarter with subscriber growth. Shares are up about 70% so far in 2012.
Banks and Housing
No two industries were more hated than banking and housing, which made those two industries the worst performing in 2012. Now that the U.S. economy continues to get encouraging signs of improvement, investors are clamoring for shares. Bank of America (NYSE:BAC), down over 50% in 2011, is up nearly 40% in 2012. Builders FirstSource (Nasdaq:BLDR), a small cap supplier of building materials to homebuilders, is also up about 45% in 2012. Even Lennar (NYSE:LEN), one of the nation's largest homebuilders, is up 18% so far in 2012.
The Bottom Line
These returns have all been helped by a rising market. The S&P 500, up nearly 6.5% so far in 2012, is off to one of its best starts in over a decade; that's a tailwind that often helps the most battered stocks. Nonetheless, for many of these businesses share prices had gotten so low as to make them attractive buys in any environment, as long as one was willing to exercise patience. While market sentiment is an important consideration, what matters most is buying below the intrinsic value of a business.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.