You don\u2019t have to have a Bronze Star for U.S. Army service in wartime Iraq to be a contrarian investor, but it helps.\u00a0That\u2019s the case for Nick Schommer, manager of the Janus Henderson Contrarian fund (JACNX JACNX). <\/p>\n
The mutual fund outperforms boh competitors and the market \u2014 and Schommer\u2019s ability to stay clear-headed and make tough decisions is a big reason why. This is what contrarian investors do.\u00a0<\/p>\n
\n
\u201cMy ability and willingness to invest in volatility is higher than most people and that leads to a lot of outperformance,\u201d Schommer said. \u201cPart of that is being comfortable with being uncomfortable. If you spend 12 months in Iraq during wartime, you are going to have to be comfortable being uncomfortable.\u201d<\/p>\n
A captain in the U.S. Army who served in Iraq and Kuwait, Schommer was awarded the Bronze Star Medal for exceptionally distinguished service during Operation Iraqi Freedom.\u00a0His Iraq experience helps him now in dealing with the grind of daily volatility in tough stock markets \u2014 and those big gulp moments. Said Schommer: \u201cI am an observer of people being uncomfortable and that encourages me make hard decisions.\u201d<\/p>\n
Schommer\u2019s other key insight on how to be a contrarian is to be OK with being different from the crowd, and never to be contrarian just for the sake of it. This is a trap many people fall into. \u201cThe market is right most of the time,\u201d Schommer cautions.\u00a0<\/p>\n
Despite the current U.S. market strength, Schommer says he\u2019s finding plenty of contrarian ideas to pursue. That\u2019s because a lot of the market return has been driven by phenomenal performance in the \u201cMagnificent Seven\u201d \u2013\u2013 including Nvidia
\n NVDA,
\n +0.37%<\/bg-quote>,<\/span>
\n Microsoft
\n MSFT,
\n +0.34%<\/bg-quote>,<\/span>
\n and Meta Platforms
\n META,
\n -0.79%<\/bg-quote>.<\/span>
\n Much of the rest of the market has been left behind. We know this because of how much the Russell 2000
\n RUT
\n (a broader U.S. market index) has lagged narrower indices like the Nasdaq 100.
\n NDX\n <\/p>\nHere are three contrarian tactics Schommer says contribute to his fund\u2019s outperformance. He\u2019s worth listening to because his fund beats its Morningstar mid-cap index and category by three to five percentage points, annualized. It also beats them over periods of one year and three years, according to Morningstar Direct.\u00a0<\/p>\n
1. Invest in misunderstood business models<\/strong>: Around six years ago Schommer bought aluminum-can makers Ball
\n BALL,
\n -2.12%<\/bg-quote>
\n and Crown Holdings
\n CCK,
\n -1.09%<\/bg-quote>.<\/span>
\n At the time, analysts looked at aluminum cans as a low-growth industry. \u201cBut we saw an industry positioned to take share in packaging,\u201d Schommer said. \u201cThe aluminum can is the most environmentally-friendly way to package products. Aluminum is recyclable and it does not degrade as you recycle it, like plastic or paper do.\u201d Those investments worked out well and the fund no longer shows holdings in these names.\u00a0<\/p>\nA recent addition in this category is Sotera Health
\n SHC,
\n +1.25%<\/bg-quote>,<\/span>
\n which offers sterilization and irradiation services for medical device, pharmaceutical, and food safety companies. \u201cIf you are Boston Scientific BSX
\n BSX,
\n -0.31%<\/bg-quote>
\n and a medical device needs to be sterilized, most likely it will be Sotera Health,\u201d Schommer said.\u00a0<\/p>\nSotera\u2019s stock was hit hard last September because of lawsuits claiming ethylene oxide emissions from an Illinois plant harmed people nearby. Sotera settled the claims in January. The stock has since recovered a lot of ground but still trades below levels in the summer of 2022, despite underlying positive trends at the company. \u201cThey benefit from mid-single digit growth of the industry and they have pricing power,\u201d Schommer said. <\/p>\n
2. Invest in undervalued assets:<\/strong> Schommer does expect a mild U.S. recession. But he thinks several economically-sensitive companies are pricing in too severe of a downturn. One example from his portfolio is Caesars Entertainment
\n CZR,
\n +0.82%<\/bg-quote>.<\/span>
\n \u00a0<\/p>\nRegional casinos are more resilient in downturns than Las Vegas gaming venues. Caesers has a strong presence beyond its Las Vegas properties in 16 states, the result of acquisitions over the years of companies including Isle of Capri Casinos and Tropicana Entertainment.<\/p>\n
\u201cThe business is quite healthy today and we think it will be resilient if we go into recession,\u201d Schommer said. Meanwhile, Las Vegas is coming back as convention and group-travel business picks up. \u201cWe are seeing very nice growth out of Las Vegas.\u201d He also thinks investors underestimate the value of Caesers\u2019 digital gaming business, which he expects to grow as more states approve online gaming.\u00a0<\/p>\n
Schommer also sees banks as undervalued assets, given their single-digit p\/e ratios. Banks are misvalued because investors aren\u2019t pricing in the sector consolidation trend that will play out over the next several years, he added. Another bullish trend favors larger banks that will take share because they offer better digital capabilities. Digital services are increasingly important to consumers. Market share growth and consolidation will benefit larger banks. \u201cWe think they will take substantial market share over the next five to 10 years.\u201d<\/p>\n
As an example, Schommer points to PNC Financial Services
\n PNC,
\n -1.17%<\/bg-quote>.<\/span>
\n Its shares trade at a forward p\/e of around 9, compared to a 10-year historical average of 12. His fund also reports a holding in Cullen\/Frost Bankers
\n CFR,
\n -0.38%<\/bg-quote>.<\/span>
\n \u00a0<\/p>\nSchommer also considers shares of Capital One Financial
\n COF,
\n +0.94%<\/bg-quote>
\n ) as overly discounted. Part of the reason, he said, is that many investors expect a rise in consumer credit issues and charge-offs in a recession. They also worry that U.S. consumers are tapped out. But Schommer believes the consumer will remain healthy. \u201cPeople tend to focus on the last crisis. The Great Financial Crisis looms large. But consumer health looks nothing like it did in 2008 and 2009.\u201d He cites employment strength, and home price appreciation.\u00a0<\/p>\n3. Invest in underappreciated growth<\/strong>: A form of liver damage called nonalcoholic steatohepatitis (NASH) is rising sharply among Americans, probably related to the rise in obesity. Biotech companies have famously failed to develop a therapy, but one that seems to be on the cusp is Madrigal Pharmaceuticals
\n MDGL,
\n +0.63%<\/bg-quote>,<\/span>
\n which has released favorable Phase III study data supporting its therapy. <\/p>\nSchommer expects Food and Drug Administration approval for Madrigal\u2019s NASH treatment within the next two or three quarters. Given the past NASH therapy failures, investors are skeptical, which is part of the draw for Schommer. \u201cWe think it has the potential to be the front-line therapy for NASH,\u201d he said, \u201cand we don\u2019t think the market recognizes that.\u201d<\/p>\n
Michael Brush is a columnist for MarketWatch. At the time of publication, Brush owned NVDA, MSFT, META, CZR, PNC and CFR. He had no positions in any other stocks mentioned in this column. Brush has suggested NVDA, MSFT, META, BALL, CZR, PNC, INTC and CFR in his stock newsletter,\u00a0Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks<\/em><\/p>\nMore: <\/strong>The recession may already be here \u2014 we just aren\u2019t calling it one<\/p>\nAlso read: <\/strong>These 7 momentum stocks ignited the market. Look out when they start to fall.<\/p>\n<\/p><\/div>\nRead the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"You don\u2019t have to have a Bronze Star for U.S. Army service in wartime Iraq to be a contrarian investor, but it helps.\u00a0That\u2019s the case for Nick Schommer, manager of the Janus Henderson Contrarian fund (JACNX JACNX). The mutual fund outperforms boh competitors and the market \u2014 and Schommer\u2019s ability to stay clear-headed and make […]<\/p>\n","protected":false},"author":1,"featured_media":45040,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-45039","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\n
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