Smart investors know that once the conventional wisdom is established, it’s time to start looking for contrarian ideas. And right now, there’s few things that market participants agree on more than the notion that global economic growth is about to fall off a cliff. This might well be the case — but what if it isn’t? If the world economy suddenly catches the market off guard by stabilizing at level of slow but steady growth, the recent collapse in valuations creates the fuel for a major rally. This is especially true now, as we exit September and inch closer to the seasonally strong period between mid-November and New Year’s.
Given the market’s tendency to catch the “crowd” off-guard, it’s time to start putting together a list of stocks that can outperform in the scenario laid out above. This is undoubtedly a risky group, but these names are likely to be an excellent source of beta if investors catch a whiff of steadier growth.
- 12-month forward P/E: 7x
- Drop from 2011 high: 37.2%
Click to EnlargeThat’s right — the first stock on the list is a European bank. But Banco Santander (NYSE:STD) is no ordinary European bank — as the company took pains to point out with a full-page ad in Barron’s last weekend, 88% of its profits are generated outside of Spain, and 51% come from outside of Europe altogether. Santander is a strong, well-capitalized global bank that has some exposure to Spain, but less than its price performance would indicate. There’s no doubt that as long as the European debt crisis remains in the headlines, the stock will face headwinds. But with a 7.5% yield, a 7 P/E and a price-to-book of 0.49, much of the bad news already has been discounted into the stock price.
Santander — with a beta of 1.83 — is a fast mover, and one with a history of generating strong returns when worries dissipate. Its shares rose about 250% in the nine months that followed the 2009 bottom, and they rebounded over 60% within two months when the first round of Europe-related worries lifted in the summer of 2010.
- 12-month forward P/E: 4.6x
- Drop from 2011 high: 57.4%
Click to EnlargeWith shares trading at $1.53, versus the high 20s back in 2005, Banco Popular (NASDAQ:BPOP) — the largest commercial bank in Puerto Rico — looks like a stock destined to disappear. In fact, BPOP actually is very healthy — and very undervalued. The company has a large (40%-plus) share of the nation’s deposits after a wave of industry consolidation has removed several of its competitors, a positive for its net interest margins. On Thursday, Popular sold a portfolio of construction loans — an long-anticipated transaction whose delay has put a modest cloud of uncertainty for the stock. The company also has a stake in a transaction processing company that accounts for nearly 40% of its current share price.
Popular, which trades at under 0.4 times book value, has dropped off the radar after being a “story stock” in the middle of the last decade. It’s risky, but it stands to benefit from both organic growth and, if economic fears subside, there is room for significant valuation expansion. The average analyst price target is $3.50, 78% above Thursday’s close.