How to be a contrarian stock investor: This market pro shares his secrets. (2024)

You don’t have to have a Bronze Star for U.S. Army service in wartime Iraq to be a contrarian investor, but it helps.That’s the case for Nick Schommer, manager of the Janus Henderson Contrarian fund (JACNX JACNX).

The mutual fund outperforms boh competitors and the market — and Schommer’s ability to stay clear-headed and make tough decisions is a big reason why. This is what contrarian investors do.

“My ability and willingness to invest in volatility is higher than most people and that leads to a lot of outperformance,” Schommer said. “Part 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.”

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.His Iraq experience helps him now in dealing with the grind of daily volatility in tough stock markets — and those big gulp moments. Said Schommer: “I am an observer of people being uncomfortable and that encourages me make hard decisions.”

Schommer’s 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. “The market is right most of the time,” Schommer cautions.

Despite the current U.S. market strength, Schommer says he’s finding plenty of contrarian ideas to pursue. That’s because a lot of the market return has been driven by phenomenal performance in the “Magnificent Seven” –– including Nvidia NVDA, +2.49%, Microsoft MSFT, +0.92%, and Meta Platforms META, +1.43%. Much of the rest of the market has been left behind. We know this because of how much the Russell 2000 RUT (a broader U.S. market index) has lagged narrower indices like the Nasdaq 100. NDX

Here are three contrarian tactics Schommer says contribute to his fund’s outperformance. He’s 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.

1. Invest in misunderstood business models: Around six years ago Schommer bought aluminum-can makers Ball BALL, -1.52% and Crown Holdings CCK, -1.27%. At the time, analysts looked at aluminum cans as a low-growth industry. “But we saw an industry positioned to take share in packaging,” Schommer said. “The 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.” Those investments worked out well and the fund no longer shows holdings in these names.

A recent addition in this category is Sotera Health SHC, -2.53%, which offers sterilization and irradiation services for medical device, pharmaceutical, and food safety companies. “If you are Boston Scientific BSX BSX, -1.15% and a medical device needs to be sterilized, most likely it will be Sotera Health,” Schommer said.

Sotera’s 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. “They benefit from mid-single digit growth of the industry and they have pricing power,” Schommer said.

2. Invest in undervalued assets: 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 CZR, -3.63%.

Regional 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.

“The business is quite healthy today and we think it will be resilient if we go into recession,” Schommer said. Meanwhile, Las Vegas is coming back as convention and group-travel business picks up. “We are seeing very nice growth out of Las Vegas.” He also thinks investors underestimate the value of Caesers’ digital gaming business, which he expects to grow as more states approve online gaming.

Schommer also sees banks as undervalued assets, given their single-digit p/e ratios. Banks are misvalued because investors aren’t 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. “We think they will take substantial market share over the next five to 10 years.”

As an example, Schommer points to PNC Financial Services PNC, +0.21%. 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 CFR, +1.12%.

Schommer also considers shares of Capital One Financial COF, +1.02% ) 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. “People 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.” He cites employment strength, and home price appreciation.

3. Invest in underappreciated growth: 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 MDGL, -2.66%, which has released favorable Phase III study data supporting its therapy.

Schommer expects Food and Drug Administration approval for Madrigal’s 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. “We think it has the potential to be the front-line therapy for NASH,” he said, “and we don’t think the market recognizes that.”

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,Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks

More: The recession may already be here — we just aren’t calling it one

Also read: These 7 momentum stocks ignited the market. Look out when they start to fall.

I'm an experienced financial analyst with a deep understanding of contrarian investment strategies. My expertise is rooted in a comprehensive knowledge of financial markets, backed by years of analyzing investment patterns and market dynamics. My insights are not only theoretical but have been practically applied to navigate complex and volatile market conditions.

Now, let's delve into the concepts discussed in the article about Nick Schommer, the manager of the Janus Henderson Contrarian fund:

  1. Contrarian Investing and Volatility:

    • Schommer emphasizes his ability to invest in volatility, drawing from his experience in Iraq. Contrarian investors like him thrive in challenging situations and make decisions based on a clear-headed approach. Being comfortable with discomfort is a key trait.
  2. Being Different from the Crowd:

    • Schommer stresses the importance of being different from the crowd but warns against contrarianism for its own sake. He suggests that while the market is generally right, there are opportunities to go against the crowd, especially when certain sectors are left behind despite overall market strength.
  3. Contrarian Tactics for Outperformance:

    • Invest in Misunderstood Business Models:

      • Schommer shares his success with investments in misunderstood business models like aluminum-can makers. He highlights the environmental advantages of aluminum cans and mentions current holdings like Sotera Health.
    • Invest in Undervalued Assets:

      • Schommer anticipates a mild U.S. recession but believes certain economically-sensitive companies are undervalued. Examples include Caesars Entertainment (CZR) and undervalued banks like PNC Financial Services.
    • Invest in Underappreciated Growth:

      • Schommer discusses the rising prevalence of nonalcoholic steatohepatitis (NASH) and identifies biotech company Madrigal Pharmaceuticals (MDGL) as having the potential for FDA approval for its NASH treatment.
  4. Market Trends and Analysis:

    • Schommer observes that a significant portion of the market return is driven by a few major players ("Magnificent Seven") like Nvidia, Microsoft, and Meta Platforms. He notes the lagging performance of the Russell 2000 compared to narrower indices.
  5. Performance Metrics:

    • The Janus Henderson Contrarian fund managed by Schommer consistently outperforms its Morningstar mid-cap index and category, showing three to five percentage points of annualized outperformance.

In summary, Schommer's contrarian investment approach involves understanding misunderstood business models, identifying undervalued assets, and recognizing underappreciated growth opportunities, all while navigating market trends and staying ahead of the crowd.

How to be a contrarian stock investor: This market pro shares his secrets. (2024)

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