You don’t have to have a Bronze Star for U.S. Army service in wartime Iraq to be a contrarian investor, but it helps. That’s the case for Nick Schommer, manager of the Janus Henderson Contrarian fund (JACNX JACNX).
The mutual fund outperforms boh competitors and the market — and Schommer’s ability to stay clear-headed and make tough decisions is a big reason why. This is what contrarian investors do.
“My ability and willingness to invest in volatility is higher than most people and that leads to a lot of outperformance,” Schommer said. “Part of that is being comfortable with being uncomfortable. If you spend 12 months in Iraq during wartime, you are going to have to be comfortable being uncomfortable.”
A captain in the U.S. Army who served in Iraq and Kuwait, Schommer was awarded the Bronze Star Medal for exceptionally distinguished service during Operation Iraqi Freedom. His Iraq experience helps him now in dealing with the grind of daily volatility in tough stock markets — and those big gulp moments. Said Schommer: “I am an observer of people being uncomfortable and that encourages me make hard decisions.”
Schommer’s other key insight on how to be a contrarian is to be OK with being different from the crowd, and never to be contrarian just for the sake of it. This is a trap many people fall into. “The market is right most of the time,” Schommer cautions.
Despite the current U.S. market strength, Schommer says he’s finding plenty of contrarian ideas to pursue. That’s because a lot of the market return has been driven by phenomenal performance in the “Magnificent Seven” –– including Nvidia NVDA,
Here are three contrarian tactics Schommer says contribute to his fund’s outperformance. He’s worth listening to because his fund beats its Morningstar mid-cap index and category by three to five percentage points, annualized. It also beats them over periods of one year and three years, according to Morningstar Direct.
1. Invest in misunderstood business models: Around six years ago Schommer bought aluminum-can makers Ball BALL,
A recent addition in this category is Sotera Health SHC,
Sotera’s stock was hit hard last September due to lawsuits claiming ethylene oxide emissions from an Illinois plant harmed people nearby. Sotera settled the claims in January. The stock has since recovered a lot of ground but still trades below levels in the summer of 2022, despite underlying positive trends at the company. “They benefit from mid-single digit growth of the industry and they have pricing power,” Schommer said.
2. Invest in undervalued assets: Schommer does expect a mild U.S. recession. But he thinks several economically-sensitive companies are pricing in too severe of a downturn. One example from his portfolio is Caesars Entertainment CZR,
Regional casinos are more resilient in downturns than Las Vegas gaming venues. Caesers has a strong presence beyond its Las Vegas properties in 16 states, the result of acquisitions over the years of companies including Isle of Capri Casinos and Tropicana Entertainment.
“The business is quite healthy today and we think it will be resilient if we go into recession,” Schommer said. Meanwhile, Las Vegas is coming back as convention and group-travel business picks up. “We are seeing very nice growth out of Las Vegas.” He also thinks investors underestimate the value of Caesers’ digital gaming business, which he expects to grow as more states approve online gaming.
Schommer also sees banks as undervalued assets, given their single-digit p/e ratios. Banks are misvalued because investors aren’t pricing in the sector consolidation trend that will play out over the next several years, he added. Another bullish trend favors larger banks that will take share because they offer better digital capabilities. Digital services are increasingly important to consumers. Market share growth and consolidation will benefit larger banks. “We think they will take substantial market share over the next five to 10 years.”
As an example, Schommer points to PNC Financial Services PNC,
Schommer also considers shares of Capital One Financial COF,
3. Invest in underappreciated growth: A form of liver damage called nonalcoholic steatohepatitis (NASH) is rising sharply among Americans, probably related to the rise in obesity. Biotech companies have famously failed to develop a therapy, but one that seems to be on the cusp is Madrigal Pharmaceuticals MDGL,
Schommer expects Food and Drug Administration approval for Madrigal’s NASH treatment within the next two or three quarters. Given the past NASH therapy failures, investors are skeptical, which is part of the draw for Schommer. “We think it has the potential to be the front-line therapy for NASH,” he said, “and we don’t think the market recognizes that.”
Michael Brush is a columnist for MarketWatch. At the time of publication, Brush owned NVDA, MSFT, META, CZR, PNC and CFR. He had no positions in any other stocks mentioned in this column. Brush has suggested NVDA, MSFT, META, BALL, CZR, PNC, INTC and CFR in his stock newsletter, Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks
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