Diverging Views on Contrarian Plays

Contrary to popular opinion, it's getting harder to find a contrarian opinion on Wall Street.

Not too long ago, the stock market overflowed with companies suffering from the aftereffects of bubbles or self-inflicted scandals. Meltdowns at high-profile outfits such as Time Warner(TWX Quote) and accounting misdeeds at big companies like Tyco (TYC Quote) were delivered on a regular basis to an investing public eager to kick the downtrodden while their stocks went down.

Meanwhile, the fallout from the good folks at Enron leveled the energy and utility sectors, collapsing the once-quiet realm of coupon-clipping widows, orphans and value investors.

The result of all this carnage was a contrarian investor's dream. The Street became so strewn with the carcasses of once-proud companies that contrarian fund managers were practically tripping over them. The key to their success, of course, was finding the proverbial babies thrown out with the bathwater.

"Sometimes when a stock is hated so intensely there is a legitimate reason for it to get pummeled, but often times people are just pricing risk incorrectly," says David Decker, portfolio manager of the $2.7 billion (JSVAX Quote)Janus Contrarian fund.

Decker's prowess in pricing risk during those salad days paid off. In 2003 and 2004, his fund gained 53% and 23%, respectively, nearly double the returns of the S&P 500. And year to date, Decker's performance has been far from shabby. He's up 6.7%, or more than seven percentage points ahead of the index, so far this year.

Nevertheless, Decker says great contrarian ideas are getting tougher to find as the market -- according to his trusty discounted cash flow model -- has grown more expensive. As a result, he has been forced to look abroad for equities with the perfect contrarian mix of low cost and investor disenchantment. The Janus Contrarian fund now holds 40% of its assets in foreign stocks, according to Decker, with the largest weighting in Indian infrastructure companies.