Calling brave investors
ANNANDALE, Va. (MarketWatch) -- When it comes to investing in individual stocks, contrarian analysis sounds perfectly reasonable -- in theory.
What could be more sensible than Nathan Rothschild's famous line that, "The time to buy is when the blood is running in the streets"? After all, if you wait to buy a stock until the news is all good, then its price will already have been bid way up and have relatively little further upside potential.
But actually behaving like a true contrarian is another thing entirely.
Just take airline stocks, for example. Please!
How many of you self-proclaimed contrarians stepped up to the plate and bought any of the stocks in this industry in recent days? The blood is surely running in the streets of that industry.
You protest? You argue that contrarian analysis, however reasonable it may be in theory, should not be construed as a license for stupidity?
I grant that you certainly appear to have a good argument. Two airlines have declared bankruptcy this week alone. Safety concerns have grounded large chunks of several other airlines' fleets, leading to countless cancellations and flight delays -- and, perhaps even worse from a longer-term point of view, causing many travelers to rethink whether they even want to get into a jet airplane in the first place.
And wouldn't a recession, which very well may be imminent, if we're not in one already, reduce demand for air travel even more? Finally, fuel prices, which are already sky high, don't appear to be headed much lower any time soon.
But contrarians don't disagree that airlines face profound challenges. The contrarian case for airlines stocks is instead based on the notion that their prospects, while bad, aren't nearly as bad as investors are making them out to be.
This, at least, appears to be the argument made earlier this week by George Putnam, editor of the Turnaround Letter, one of the genuine contrarians among the several investment newsletters I monitor. In the April issue of his newsletter, Putnam writes that "the airline stocks look awfully cheap to us right now."
Putnam uses this "it is bad, but not that bad" argument to respond to those who believe that a recession is a reason to avoid airline stocks, for example. "While it is true that travel expenditures are somewhat related to the overall economy, the major airlines are in much better shape this time around compared to past downturns," he writes.
"In the past economic cycles, airlines expanded rapidly during good times, buying new planes, adding routes and letting expenses creep up. Then when the downturn hit, they found themselves with too much debt and a lot of empty planes. Over the last few years, however, the airlines have behaved very differently. They have been disciplined and did not buy planes or add routes, and they focused on keeping costs down. As a result, they should perform much better than they have in the past if we are indeed in an economic downturn."
Which airline stocks in particular does Putnam especially like?
"While we like all the airlines at current prices, we're particularly attracted to Delta Air Lines Inc. Del. (DAL)and Northwest Airlines Corp. (NWA). As the carriers that most recently restructured in Chapter 11, they have among the best cost structures and balance sheets. Also, they could both benefit if their on-again off-again merger actually comes to pass."
To be sure, Putnam in the same issue of his newsletter concedes that there is a fine line between being early in recommending a stock and being just plain wrong. But he nevertheless believes that for those who are particularly brave, airline stocks right now "hold great promise."
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.