The idea behind contrarian investing is certainly nothing new, as many investors – including some legendary ones – have been “going against the crowd” for decades. Warren Buffett was famously quoted saying ”be greedy when others are fearful;” the now well-known mantra that has defined the very foundation of this investment strategy. Contrarian investors look for stocks that have consistently lagged the market and their sector peers and snap them up at bargain prices, waiting for the security to make a turn around and potentially provide them with some lucrative returns [see also Third Time's A Charm? Best ETF Plays For QE3].
Obviously this strategy is not for the faint of heart, as the risk that some of these investments might not make it out of the woods is relatively high. Therefore, it is critical that all contrarian investors do their homework and take a close look at the fundamentals of each exchange-traded product to decide how much potential value the investment could generate.
Last year, ETFdb published an article about investing in the dogs of 2011 and how perhaps some of these laggards could generate some intriguing opportunities in the future. Of the funds that were mentioned, the Egypt Index ETF (EGPT) has hands down made the biggest turnaround, gaining nearly 60% this year alone after being brutally hammered in 2011 [see also 8% Yield ETFdb Portfolio Now Available].
Of course there is no exact science to picking the diamonds out of the rough, but keeping a close eye on some of the 2012 laggards could be a prime opportunity for getting the most bang for your buck (year-to-date returns as of October 11, 2012):
Gold Explorers ETF (GLDX): Down -18.05%
Although gold has had a relatively strong performance thus far in 2012, gold miners and gold explorers have struggled to stay afloat. The spread between these two segments of the market were once closely correlated, but rising spot prices in the yellow metal have done nothing to buffer the rise in production and operating costs many in the industry are now experiencing. And as gold miners and explorers struggle to turn out profits, the gap between these stocks and gold spot prices continues to widen.
There is, however, a possibility for these equities to make a turn around in the near future. Many hot-shot analysts and legendary investors have recently expressed their distaste for actions from Bernanke and the Fed, citing that their rampant money printing will only make matters worse. To prepare for the fiscal cliff, these market gurus have started piling millions of dollars into gold as a hedge against the inevitable inflation that will arise from QE3. If spot gold prices are to rise to the astronomical levels that some have predicted, gold explorers might finally be able to turn a profit.
Market Vectors Coal ETF (KOL): Down 22.29%
KOL’s dismal performance thus far in 2012 has illustrated just how much coal has fallen out of favor as an energy source. The U.S. Energy Information Administration attributes the decline to lower demand, which stems directly from the drop in natural gas prices. The slowdown in China has also weighed heavily on the commodity, as it is seen as the main reason global coal demand is down [see the best performing ETFs in 2012].
And while this commodity is not necessarily one of the most popular in the space, it has recently gotten a lot of attention from analysts who believe that this beaten-down energy source could see a nice boost in the near future. Many experts believe that if the current rise of natural gas continues, then coal presents an enticing long position. Some have even speculated that a Romney victory in the election could also help buoy this commodity.
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Disclosure: No positions at time of writing.