Many people call themselves contrarian, but it's a tough thing to actually be. It's a very uncomfortable feeling to have your opinion oppose that of the majority. Additionally, you have to face an onslaught of criticism that you're somehow unscrupulously profiting from your anti-establishment views.
But as demonstrated in my
first column about
The Real Story
isn't going to shy away from taking a stand, contrarian or otherwise. With that first column on the books (and with apologies to Mick Jagger) please allow me to introduce myself.
Prior to joining
, I was a senior equity analyst with Avalon Research -- a boutique research firm that prided itself on its contrarian stance. In fact, we wouldn't cover a stock unless it went against the consensus (or was underfollowed in the case of some buy-rated stocks). I plan on taking the same approach in this column. I will point out catalysts that the Street is either unaware of or is ignoring. Once these inflection points become more obvious, the stocks often make considerable moves -- in the opposite direction of the consensus viewpoint.
Lamar Advertising, for example, is a well-loved company with some serious flaws, in my opinion. You can read about why I think the stock should be sold in my first column. Another stock that I believe merits a sell rating is
BJ's Wholesale Club
. I covered BJ's while at Avalon. At the time, few analysts were telling investors to sell the stock outright.
I initiated coverage on BJ's in late August, when the stock was trading slightly above $29. The shares declined to a 52-week low of $25.30 on Dec. 5. With the recent spike due to takeover rumors, I believe sellers have another opportunity to get out while the getting's good.
BJ's is a distant third to
-owned Sam's Club in practically every metric in the warehouse club space. The company faces stiff competition from Costco and/or Sam's in 90% of its markets. Furthermore, BJ's plan to build new stores that are close to existing clubs appears misguided. BJ's suffers from a lack of brand equity. Putting new stores near old ones will do little to increase brand awareness.
Declining traffic is another problem. Compared to last year and excluding gasoline sales, traffic has been down every month but two this year. The company hasn't reported a positive traffic number since April. Management would have to make some significant operational improvements to offset the impact of fewer customers walking in the door.
The buyout rumors don't make a lot of sense to me. Admittedly, the stock is not expensive and the balance sheet is clean. Yet it's hard to imagine that anyone (even the talented people at Bain and KKR -- two of the groups mentioned in the takeover rumor) think they can out-manage Costco and Wal-Mart in a notoriously cutthroat business with razor-thin margins. Furthermore, if a buyout was imminent, I doubt BJ's former CFO, Paul McDonough, would have quit in December after just seven months on the job.
The stock historically trades at roughly a 20% discount to the
and a 30% discount to the S&P Retail index, which puts it in the $25 to $27 range vs. Monday's close of $29.25.
So why is my original $24 target still appropriate? I believe the company will fall short of the Street's EPS fiscal 2007 forecast of $2.05 (down a nickel in the past four months, by the way) and will likely report earnings of $1.99 or less. A takeover might be more enticing down at the $24 level; but at current levels, I don't see it happening.
BJ's and Lamar are the kinds of stories that get my juices flowing. What excites me about this column is the intellectual honesty and freedom. I can't guarantee that every pick will be a home run. But I can promise you that my opinions are not being biased by outside influences. This is important because much of Wall Street research is still greatly affected by investment banking.
The ongoing relationship between investment banking and research was made perfectly clear to me in recent meetings with several firms. At one I was told: "Despite what Mr. Spitzer thinks, investment banking is what drives this business." At another, an analyst mentioned that he was bringing the CEO of one of the companies in his universe to meet his sales force. What do you think the odds are that this analyst will slap a hold or -- dare I say it -- a sell rating on that company?
Some have argued that investment banks would prefer to do business with strong companies, ones that merit a buy rating. There is some validity to that point. However, it's naive to think that the research influences investment-banking decisions instead of the other way around.
I will not be biased by such influences. However, there will be times where I'll get the idea for a column from an industry contact. It's inevitable that some sources will be talking their book. That's fine with me. The people whose brains I'll be picking are very shrewd and diligent investors. If they have put their money where their mouth is, that suggests they have conviction in what they're telling me.
I will always disclose any position that a source has in the stock that is being discussed. Furthermore, a source's recommendation will be the starting point for my own research, not the conclusion. (Please note: I am in compliance with
policy of not owning or being short any stocks.)
The reason this column is titled
The Real Story
is because, in my opinion, investors are not being told the truth -- either through negligence or by design. It can be a pretty scary proposition to separate yourself from the pack and say that all of your fellow analysts are wrong on a particular stock. If you go against the pack and you're the one who is wrong, it will likely impact your compensation.
Despite the fact that the media sometimes characterize analysts as being empty-headed, I've never met one that wasn't smart -- in fact, very smart. Yet still, many of them fall victim to groupthink. This isn't to say that the consensus is always wrong. Quite often the reasons are obvious why a company's performance is strong and should continue. Many times a stock deserves a buy rating and everyone on the Street is willing to oblige.
My job is to exploit the situations where the analysts, for one reason or another, are either purposefully blind or unenlightened to
The Real Story
Pleased to meet you. Now you know my name.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany.