Signup for our free newsletter:

Contrarian Health Investing

Written By Brian Hicks

Posted October 16, 2008

Fear… Loathing… Crash… Panic…and even Depression. For a headline writer these days the financial crisis has been an absolute gold mine— sort of like a shooting for the 5 O’clock news but for the business pages.

If it bleeds, it leads.

Of course, the politicians can’t help themselves either when it comes to this type of fear-mongering. In a way, it is right up their alley.

But when you put it all together, the constant drumbeat of all of this pessimism adds up to one thing — pure hysteria. 

The result has been a market in which a full 45% of its value has been suddenly lost — as if somehow American businesses are now worth $8.1 trillion less than they were 12 months ago.

That is the cold, dark and irrational fear the markets are reflecting these days as anyone and everyone heads for the mattresses.

In short, it is a contrarian investing dream as the opportunity to bet against crowd grows with every scary market drop.

In fact, according to TrimTabs Investment Research, last week’s sell-off turned into a virtual stampede as nervous retail investors headed for the doors and the vix indicator screamed higher.

For the week, a whopping $25.9 billion left the U.S equity markets, with $5.8 billion in equity withdraws alone last Friday. That put equity redemptions at $55.8 billion for the month, easily beating the earlier record of $52.6 billion set in July 2002.

U.S. hedge funds, meanwhile, got hammered too with some $43 billion of redemptions in September and heavy selling continuing into this month.

Everybody, it seems, suddenly wanted out-no matter what the price as cash became king.

However, there is only one thing wrong that strategy and it is a biggie: the return on investment for all of that cash is a big fat zero… zilch… nada… nothing.

And isn’t that what investing is all about?

After all, wealth creation actually involves owning something rather than nothing.  There is no substitute.  Risks or not, that is how it is done.

Contrarian Investing Takes Nerves of Steel

That’s why now is the time to bargain hunt as we reach the point of stock market capitulation.  It’s there where contrarian investors tend to find the next market winners as all of that forced selling pushes stock prices too far, too fast to the downside.

Unfortunately, it also takes nerves of steel.

But that is where we found ourselves last Friday at the moment when all seemed lost.

However, we weren’t headed for the exits on Friday morning, we were wading in.  And while it seemed kind of nuts at the time there was a definite rationale behind the buying: The markets were pricing a depression that wasn’t going happen.

As a result, even blue chip stocks became blue plate specials.

Instead, we went long on the day buyings 13 stocks in total. They included, big dividend payers, muni-bonds, and healthcare stocks. In short, reasonably safe plays in unreasonably unstable times.

Time to Buy the Best in Healthcare Stocks

One of them was my favorite long term stock of all time — Johnson & Johnson (NYSE:JNJ). It fell as low as $52.00 amid the panic on Friday morning.

That is a share price that equates to roughly zero earnings growth for this healthcare giant over the next 5 years on a fundamental basis. Now ask yourself how likely that scenario really is.

Zero growth in the healthcare industry?  It’s not going to happen — especially at a company like JNJ.

Instead, when Johnson & Johnson released their 3rd Q earnings earlier this week sales were up 6.4% from a year earlier as the company beat expectations yet again. Moreover, the healthcare giant also upped its final 2008 guidance well beyond its previous range.

Not surprisingly the company’s share price responded in kind rising as high as $67.48 in intraday trade on the day of the release. For buyers on that gloomy Friday morning that turned into a 28% gain in just days on a blue chip.

Of course, since then the stock has pulled back a bit with the rest of the market.  But that’s to be expected in this volatile environment.  

Either way, that’s the type of stock that contrarian investors should be focusing on at this point in the cycle and the healthcare industry is full of them.  Of all of the sectors, healthcare is the most recession-resistant.

Heck, it is the one area of the market could probably even weather a depression — even if we not going to have to one.

So forget the gloomy headlines and the fear-mongering. All is not lost. As every contrarian investor knows, it is times like these that always deliver the next big winners.

Afterall, how can you buy low and sell high if you’re not willing to go against the crowd at times.

Now is one of them.

Your bargain-hunting analyst,

 steve sig

Steve Christ, Investment Director

The Wealth Advisory

PS. As I type those 13 buys we made on last Friday are a hefty 11-2 to the good side with an average gain of 14%. Meanwhile, the two stocks that dipped into the red are only down 1% each. Not bad.

To learn more about those stocks and the service that provided them click here.

It will be the best $49 you ever invested.