(Story updated with insight on Southwestern Energy from Morningstar analysts)
NEW YORK (TheStreet) -- A "contrarian" investment approach can yield big returns if investors target quality stocks that have fallen out of favor for one reason or another.
Being overly pessimistic when a stock is in free fall or too optimistic when shares surge can do serious damage to a portfolio, says Jeffrey Sica, chief investment officer of Sica Wealth Management, whose firm has more than $1 billion in client assets, real estate and private equity holdings under management.
"The herd is usually wrong," Sica cautions.Sandy Villere, co-manager of investment firm Villere & Co, agrees. He says for instance that investors who were overly pessimistic about Constant Contact (CTCT) when shares were "out of favor" have now missed the boat on the stock, which is up nearly 35% year-to-date as of Tuesday's close at $31.31. The stock was weighed down last summer by expectations that the provider of online market services using email and social media wouldn't be able to attract as many subscribers as they had hoped because many of its services were still too new to the market. Their offerings were "not yet well understood," Villere explained, and subscriber growth in the company's fiscal third quarter was less than expected, scaring away buyers. But "that was just a quarter anomaly," said Villere. Villere decided to build a position in Constant Contact months ago when the shares were still in the $16-$20 range. "The company was really misunderstood," said Villere, who was especially bullish about a social media marketing tool the company launched for small business owners wishing to target Facebook and Twitter users. "It allows a florist for example the opportunity to get out a message about roses being on sale in ways they may not have been familiar with to all of their customers," he said. Given the company's exposure to the Facebook frenzy, the social media giant's filing to go public on Feb. 1 has been a boon for Constant Contact investors, and the stock was carried back above $30 in the wake of the news. Another example of this strategy that Villere cites is card payments company Visa (V). He started buying the stock when it got down into the $70 range last March amid worries that the proposal by Sen. Dick Durbin (D, Ill.) to limit interchange fees would hurt Visa. The shares closed Tuesday at $118.95, up 60% for the past year. When Villere looked at Visa, he saw a company with solid cash flow and a strong management team. As it turned out, the rulings on interchange fees were less onerous than expected, and Visa has been hitting new highs in the wake of yet another above-consensus earnings report earlier this month. "If people get too excited about the stock, we'll sell it," he says. Even with the run-up, Visa shares are trading at a forward price-to-earnings multiple of 16.8X, pretty much in line with rival Mastercard (MA) at 16.4X, whose shares have jumped 75% in the past year. The following are three "contrarian" stocks that investors can still get in on.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV