They Love Those Unloved Stocks

By Stephen Koepp

Contrarians pursue profits by running against the pack

Looking for an offbeat investment prospect? Well, consider a St. Paul company called American Hoist & Derrick. A typically depressed heavy-equipment manufacturer, Amhoist lost $21.8 million last year and is expected to wind up in the red again this year. Two of its primary markets, the petroleum and timber industries, remain sluggish. Its stock has been sagging in the bull market and now sells for $15, vs. a high of $26, reached in 1980.

Not interested? Openly contemptuous, in fact? Then you are hardly a contrarian. To a good contrarian, Amhoist's expected profits in 1984 will still be meager enough to make it an out-of-season bargain, like snow tires in July. The fact that few other investors are attracted to it is all to the good. Contrarians are a stubborn breed who relentlessly resist the natural human tendency to run with the pack, and Amhoist is just the kind of stock they thrive on. Or hope to.

Of course, maintaining such an attitude is hard work, requiring constant discipline and regular rededication. Thus for the past 21 years, contrary investors have annually trekked far from Wall Street's madding crowd to band together for a few days and offer one another encouragement and advice. Last week more than 300 gathered in Vergennes, Vt., for the Contrary Opinion Forum at a resort on the shore of Lake Champlain.

Donning a battered top hat, Conference Organizer James Fraser, 53, called the meeting to order by banging a soup pot with a wooden spoon. The members of his audience, who ranged from stock-market dabblers to professionals from Merrill Lynch and Dean Witter, wore buttons proclaiming slogans like THINK FOR YOURSELF. Said Fraser: "Contrary opinion teaches us to be thoughtful nonconformists, keeping us from being led astray by popular opinion."

Like all other investors, contrarians follow the obvious credo of buy low, sell high. But they avoid buying or selling at obvious times. They also avoid securities heavily favored by analysts, the ones that most investors buy, because contrarians believe that mob psychology has already made the stocks too expensive. Says Fraser: "We seek unloved situations before they become attractive to others." A former New York City banker and Wall

Street broker, Fraser draws his authority from the fortnightly Contrary Investor newsletter ($80 a year), which he publishes from his stone house overlooking Lake Champlain. In August 1981 he urged his 1,000 subscribers to buy Sears, whose stock had fallen to $16, from $62 nine years earlier. Most investors perceived the retailer to be in terrible shape, but Fraser believed its troubles would pass. Last week Sears shares closed at $40.

The father of the Vermont strain of contrarians was the late Humphrey B. Neill, a successful Wall Street trader who retired to the woods and mountains, and published The Art of Contrary Thinking in 1954. Said he: "When everyone thinks alike, everyone is likely to be wrong." One of the original contrarians was English Economist John Maynard Keynes (1883-1946), who made about $10 million trading stocks and bonds, primarily during the Depression. Keynes found a few unpopular stocks that were sounder than their prices alone would indicate. Like today's contrarians, he bought them for the long haul, recommending "a steadfast holding of these in fairly large units through thick and thin ... until either they have fulfilled their promise or it is evident that they were purchased on a mistake."

Speakers at last week's forum sought to reinforce the maverick tendencies that enable contrarians to resist the superstar issues hyped by stockbrokers and the financial press. Carlton Lutts, editor of the Cabot Market Letter, recommended International Harvester stock, despite the company's 1982 losses of $1.6 billion. Said Lutts: "The less appeal there is in the financial community, the greater the potential in capital gains." Other companies boosted at the forum included the struggling Bethlehem Steel and the sluggish Aetna Life & Casualty.

Some contrarians acknowledged that the approach is by no means infallible. John Bennett, senior vice president of Boston's successful Batterymarch Financial Management, confessed to taking a bath on Braniff stock after buying it only six hours before the airline declared bankruptcy.

The independent thinking heaped on the contrarians last week included the outlandish. Giving a long-term contrarian weather forecast, Climatologist Iben Browning predicted massive volcanic eruptions in the northern hemisphere in 1989-90 that will cause economic ruin. He warned sternly: "You have five years to get your ducks in a row."

Most contrary investors are moderates compared with their predecessors of 20 or 30 years ago. Although many steadfastly refused to participate in the frenetic run-up of such high-tech stocks as Apple Computer and Genentech, the bioengineering firm, they occasionally concede that there may be some validity to conventional wisdom. Last week contrarians agreed that IBM is still a good buy even though it is popular.

Yet when the demon of consensus appears, contrarians begin to worry. A crowd of contrarians is a crowd all the same. Boston's Fidelity Group offers a Contrafund, which has sizable holdings in such firms as Texas Instruments and Canadian Pacific. Merrill Lynch has its Phoenix Fund, comprising shares of such recuperating companies as Manville and Ford. Contrariness has become so common on Wall Street that David Dreman, author of the 1982 book The New Contrarian Investment Strategy, sees the beginnings of a splinter group. Its name: the countercontrarians.

--By Stephen Koepp. Reported by Joelle Attinger/ Vergennes

With reporting by Joelle Attinger This file is automatically generated by a robot program, so viewer discretion is required.