Going Against the Herd

This week, Barron's published its semiannual "Big Money" poll outlining the views of 100 American money managers ("The Long View").  As contrarians, this is something we read with a lot of interest.  Professional money managers may be more sophisticated in their investing decisions than the average man on the street, but they are certainly not immune to overreaction and to extreme oscillations between greed and fear.  Since they tend to travel in the same circles and read and watch the same financial media, they are also quite prone to herding behavior.  And herein lies the opportunity for an investor willing to go against the herd.  
Whenever sentiment toward a particular stock, sector, commodity, or even an entire country becomes nearly universally bullish or bearish, it is often a good idea to bet the other way.  If you're impatient, you may end up getting in too soon--as even the great Warren Buffet often does--but over time, this approach has paid off quite handsomely for many contrarian value investors.  The reasons are obvious.  When "everyone" is bullish, there is no one left to buy, which means that the rally will eventually lose steam and collapse under its own weight.  Likewise, if "everyone" is bearish, there is no one left to sell.  So, with all of that said, what is the Big Money saying?
Barron's reports that the Big Money managers are only 59% in stocks--a historic low.  Historic low?  So far so good.  Less money in stocks means more money available to enter the market going forward.  59% report being "bullish" or "very bullish."  This is a low number but not quite low enough to be interesting to us.  
What we did find interesting is the sector breakdown.  The Big Money managers were asked to offer their predictions for the best performing and worst performing sectors over the next 6-12 months.  A full 25% rated Financials as their top buy, with Technology and Energy following with 18% and 16%, respectively.   On the bearish side, 21% rated Consumer Cyclicals as the worst performer over the next 6-12 months followed by Health Care and Consumer Staples at 18% and 15%, respectively.  
If we lumped Consumer Cyclicals and Consumer Staples into one broad "Consumer" sector, a full 36% of the Big Money managers were bearish on the American shopper--far and away the highest concentration in either the bull or bear camp.  And this is exactly the kind of extreme herding that we look for.  
It is no secret that the retail economy is in shambles.  Familiar stores and brands appear to be dropping like flies.  In today's paper, we see that GM's Pontiac brand is being phased out after 83 years of production, and we suspect that it won't be the last household name to disappear before this recession officially ends.  
So, we make no illusions about the health of the U.S. consumer economy.  It's in bad shape; of this there is no doubt.  That said, however, we believe that consumer stocks may be the best value out there at the moment.  As we said before, when everyone is bearish there is no one left to sell.  And we believe that in the case of the consumer sector, the bad news is already factored in to current prices.  Any slight hint of recovery could see this sector soar relative to the general market.  We said this about the luxury goods subsector in our last post, and we would reiterate that point here.
Speaking of the luxury sector, the same issue of Barron's had some positive comments on leather-goods maker Coach, which--in the midst of the worst recession in decades--just declared its first dividend.  The company also aggressively repurchased 3.6 million of its shares last quarter at an average price of $13.98.  Not bad, considering the price was $23.19 at time of this writing.  Barron's notes that Coach "generates significant cash flow and has virtually no debt."  This means that Coach is financially strong and has the ability to survive a prolonged downturn intact.  The same can be said of many of the company's rivals in the luxury subsector.
Returning to the Big Money, we see one last concentration of opinion that deserves comment:  fully 84% of the respondents were bearish on U.S. Treasuries! We would have counted ourselves among that 84%, though now we are less sure.  Opinion that concentrated is almost never right.  We would refrain from buying Treasuries at current prices, as the 2.9% yield simply does not offer compensation for the downside risk.   But given the near universality of opinion, we would also refrain from shorting the sector.
Charles Lewis Sizemore, CFA
www.charlessizemore.com

Check out Charles's new book, available on Amazon.com: Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

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