What a difference a quarter can make. At the end of Q3 the skies were blue and investors were happy. Now, according to the media, the world is ending. Non-stop talk of trade wars, plummeting oil prices, a government shutdown, and monetary policy uncertainty and fear. Guess what? This market will go higher and if you wait for the robins, spring will be over. If you’re sitting on the sidelines (i.e. holding more cash than usual), here are three attractive contrarian investment ideas for you to consider.
1. Sell Cash-Secured Income-Generating Out-of-the-Money Put Options on Stocks You Like.
This is the most conservative idea on our list for those of you who like generating cash but still fear the market go lower, and you wouldn’t mind buying attractive stocks if their prices fall even lower.
For example, you can generate $0.45 for selling put options on Triton International (TRTN- a stock we like and wrote about recently here) with a strike price of $30 (the shares currently trade at $33.77), and with an expiration date of February 15, 2019. Keep in mind options contracts sell in lots of 100, so you’ll generate $45 in cash for selling each contract, and you’ll need to keep $3,000 in cash in your account ($30 x 100) in case the shares get put to you (assuming you don’t want to use margin (i.e. borrowed money) to buy the shares if they get put to you).
The main idea behind this trade is that you can generate attractive upfront income now (the premium income for selling the puts), and you get the opportunity to own the shares of Triton at an even lower price (if the price falls and the shares get “put” to you).
The big risk here is that if you really like Triton, the shares may never get put to you, and you’d miss out on any long-term gains if the price of Triton goes much higher (we believe it could—we currently own shares of Triton—we picked them up after the shares were “put” to us at $30 on a similar options trade). However, you do get to keep the premium income you generate for selling the puts, no matter what.
Overall, this strategy works on a variety of stocks (so long as you’d be happy if the shares get put to you) especially since market volatility has been relatively higher lately (higher volatility/uncertainty means higher premium income available for selling puts).
2. Buy General Electric (GE)
You’d have to be completely insane to purchase General Electric; the shares have experienced a historic fall, the dividend has been reduced to only a penny, they’re on their 3rd CEO in the last two years, and the company got kicked out of the Dow Jones last year.
However, as a contrarian, it might behoove you to consider GE. For starters, it been starting to actually get some upgrades and buy recommendations from the street, as shown in the following graphic (the green bars are buy recommendations).
Specifically, almost half of the 22 analysts covering the stock now have buy ratings, and the price target ($11.52) is 33% higher than the current share price.
Next, news that private equity group Apollo Global Management is showing interest in buying GE’s Jet Leasing business, which is worth as much as $40 billion. Not only will this create a lot of much needed near-term cash flow for GE, but it’s a good indication of just how beat up General Electric shares actually are (Apollo and private equity in general wouldn’t be interested if GE’s market value wasn’t extremely beat up—they like to buy very low).
And finally, despite the market’s pure hatred for GE’s stock, the company is expected to generate powerful cash flows from operations in future years (according to analysts) as shown in the following table.
If you are a contrarian, General Electric could be one heckuva value play right now. We own shares.
Adams Natural Resources Fund (PEO), Yield > 6.0%
We wrote about this one recently here, and we’re highlighting it again as the market sell off (and the energy sell off, in particular) have caused this attractive closed-end fund to trade at an attractive price and an attractive discount to its net asset value.
PEO is a closed-end equity fund specializing in energy and natural resources stocks. It’s internally managed, and its inception date is 1929 (it’s been paying a dividend for over 80 years!). Because it is a closed end fund, it can trade at a discount or premium relative to the value of its holdings, and it is currently trading at an attractive discount (see chart below) because there has been so much energy sector selling pressure in general.
There is no guarantee that the discount to NAV will ever entirely disappear, but it may well return to a more normal level—which is good for investors. Also, because it trades at a discount, that basically means investors get to buy the yield/dividend of the underlying holdings at a discounted price. This is a very attractive proposition for investors. You can read more about PEO in the link provided above.
The market will eventually go higher. Despite the relentless media gloom and doom, the economy is healthy. Unemployment is low, GDP is strong, and business is good (for example, the forward price-to-earnings ratio for the S&P 500 is much lower than it has been recently, as shown in the following chart, an indication that prices are low relative to future expected earnings).
It can be difficult psychologically to buy when the market is selling off and fear is high, but that’s usually the best time to buy—especially if you’re buying attractive long-term businesses.