Ask TheStreet: Bad Sector, Good Stock

Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.

---

I have been building a position in a stock which is in a sector that seems to be universally hated right now. I am starting to rethink this strategy. Thoughts?

-- Submitted via Stockpickr Answers

It sounds like you are acting like a good contrarian investor, which is a strategy used by many of the most successful investors in the world. Just think of Warren Buffett (Stockpickr Portfolio) who tends to invest in "boring" and "old" (but financially strong) companies like Coca-Cola (KO Quote) and Wrigley (WWY Quote).

At any given time, certain sectors will perform better than others. Investment managers use sector rotation strategies to capitalize on the current economic cycle.

If you are investing in a "hated" sector, that means you are buying a stock in a sector that is cheap, which is the best time to buy anything. Eventually, your sector will come back into vogue with the economy and investors.

Utilities, for example, were considered a boring sector during the Internet and technology bubble of the 1990s. The utility stocks were hated and went nowhere. But when the tech bubble popped, utility stocks like Allegheny Energy (AYE Quote) and Dominion Resources (D Quote) everntually started to take off because people wanted stocks that offered dividends and "safety."

Meanwhile, if you were chasing tech shares in early 2000 because it was a "hot" sector, then you were in for a big, big fall.

As a contrarian investor, however, make sure, that it's the sector that is "cold" and not your particular stock. For example, Motorola (MOT Quote) is struggling to compete with Apple (AAPL Quote) and Nokia (NOK Quote), which are all in the hot mobile device "space."

If you own shares in a bad company, then don't expect the rising tide of a good sector to lift your boat too much. Bottom line: If you want to own a stock in a hated sector that will eventually come back, then make sure it's the best one in that sector.