It’s impossible to out-perform the stock market if you always buy and sell what everyone else is buying and selling. Contrarian buyers of General Motors (GM) stock, Schlumberger (SLB) and United States Steel (X) believe that the market has it wrong on these three stocks…and they’ve got some solid facts to support their case.
General Motors (GM) Stock
Record profits? Check. Historically-low P/E multiple? Check. Largest share of the massive U.S. auto market? Check. Extremely generous 5% dividend? Check.
With all these positives going for it, you’d expect GM stock to be hitting new all-time highs on a weekly basis. Instead, the stock is down 10.2 percent in the past two years.
It seems as if the market is punishing GM for its bumpy past, but all signs point to a 180-degree turnaround for the leading U.S. auto maker. Perhaps the market thinks that GM is going take a big hit from electric car competition from the likes of Tesla Motors (TSLA). But while TSLA will soon roll out its highly-anticipated Model 3, GM has gotten relatively little attention for its 2016 rollout of the Chevy EV Bolt, which is expected to price in the $30,000 range and deliver a 200-mile electric driving range.
Whatever the reason, the market has turned its nose up at GM, but contrarian deal hunters don’t care what everyone else is doing.
The S&P 500 is once again approaching its all-time high, but the global oil industry is in the exact opposite point in its cycle. WTI crude prices hit 12-year lows in February, and the entire industry has now gone into lock-down mode in terms of cutting costs and production. A growing number of analysts seem to believe that a “lower-for-longer” oil environment is inevitable at this point. Low prices mean less production, and less production means less business for oil services companies like SLB.
However, oil prices have shown some resilience since February lows, and the head of the International Energy Agency’s Oil Industry and Markets Division believes that the huge production cuts could be setting the stage for an upside price shock a couple of years down the line. If oil production has to play catch-up once the current glut has been fully-digested, SLB will be poised to capitalize. SLB has spent the downturn cutting costs, developing more efficient products and making timely acquisitions, such as deepwater specialist Cameron International (CAM). In addition to being the largest U.S. oil services company, SLB also has a well-established presence in the international oil market.
SLB shares are down 25% in the past two years. But sometimes being a contrarian investor is simply a matter of making a trade a few months before the rest of the market does.
United States Steel (X)
The global steel market is at a similar cyclical low point, but Credit Suisse believes that the upswing may have already begun. Credit Suisse is one of the few Wall Street firms that has turned bullish on the U.S. steel industry of late. In a report released on March 11, analyst Curt Woodworth said that he believes “US prices are likely to experience the strongest recovery as not only will prices increase with the global market but premiums should expand from trade case protection.”
Long-time contrarian investors know how Wall Street analysts love to play follow-the-leader when it comes to upgrades and downgrades, and Credit Suisse could be the first drop in a coming flood of 2016 United States Steel upgrades.
Credit Suisse’s price target suggests 40% upside for United States Steel, while the average price target of other Wall Street analysts suggests 30% downside.
As of this writing, Wayne Duggan was long SLB.
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