January 2012 was a great month for contrarian stock pickers. A month is certainly not a sufficient time period to make any sort of forecast, but so far, 2012 has been very good to some of the most hated stocks in the most depressed industries.
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Interestingly enough, the market decided that the arbitrary date from December 31, 2011 into January 1, 2012 was enough to give financials a boost. On the first trading day of 2012, financials began to rally and haven't looked back. Apparently investors wanted to own in January 2012 what they wanted to sell a few weeks prior. One of worst performing stocks in 2011, Bank of America (NYSE:BAC), has been one of the best, and is up over 30% so far in 2012. While the financial chaos in Europe can still cause volatility to financials here in the U.S., BofA's depressed valuation has attracted deep value hunters. Another bank people love to hate, Goldman Sachs (NYSE:GS), has been very kind to investors in 2012 with a 25% advance. In fact, financials as a whole have been the place to be in 2012, with the SPDR Financials (NYSE:SLF) up nearly 10% year to date, more than doubling the return by the S&P 500. (For related reading, see The Rise Of The Modern Investment Bank.)
Housing- and construction-related stocks have also been moneymakers for investors in 2012, as many investors are starting to believe that a meaningful recovery may finally materialize over the next couple of years. Construction equipment manufacturer Terex (NYSE:TEX) is up a stunning 49% so far in 2012. Despite this run-up, Terex shares are trading at a price-to-sales ratio of 0.40 and price-to-book ratio of 1.2. By comparison, Caterpillar (NYSE:CAT), which is up over 18% this year, is trading at a P/S ratio of 1.2 and P/B of over 5.5. Reliance on book value is not an effective instrument for a business like Caterpillar, which derives enormous value from its brand name and customer relationships.
Even small cap Builders FirstSource (Nasdaq:BLDR), which supplies building materials directly to homebuilders, is up a tidy 25% as there is hope that housing starts will stabilize in 2012 and then grow nicely in 2013. BLDR shares traded above $20 before the housing crisis and now trade for $2.70. The severe decline in market value suggests a nice upside still to come when housing starts grow again.
Hated Equals Value
What is hated on Wall Street can often be a chance to buy quality assets at depressed prices. The month of January, albeit a healthy one for the stock market, reveals the potential upside in buying shares in businesses that have been widely feared.
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