Out-of-Favor Favorites

02/18/2005 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

"As a contrarian, I prefer holding a minority opinion," says Jamie Dlugosch. Cynically, he notes, "If Wall Street considers your ideas to be 'bad' ones, then you will likely be right more often than not." Here, he looks at some of his favorite out-of-favor plays.

"One of my general themes – which is almost heresy on Wall Street – is that I’m not a fan of dividend stocks. I take an old-school approach to the concept of dividends. When I’m buying shares of a corporation, I’m trusting the managers of that business to use all of the capital to generate a significant return. To me, the concept of dividends is a little bit like passing the buck. While dividends may be attractive to a certain segment of the market, I would prefer to seek superior performance through companies that are finding ways to invest that cash.

"What do I like now? In the last 13 months the market has essentially traded sideways. During that same time, earnings have grown on a double-digit basis. When those on the sidelines discover that the fear of collapse was unjustified, the longs will be rewarded with higher prices. As a result, stocks are now cheap, and I’m going to be really aggressive in my portfolios. To me this is a wonderful opportunity.

"Sirius Satellite Radio (SIRI NASDAQ) is becoming one of my favorites. Early investors watched the shares peak at $60 per share, only to watch the company have difficulty proving its model. At its nadir, SIRI dropped to nearly $2. At the same time, satellite radio was just starting to take hold. We used the extreme weakness to acquire shares, and we have been rewarded thus far. And I continue to see this as an opportunity. The company now has about $7 billion in market cap. They are losing money. It’s not a pretty situation on a fundamental basis. But long-term investors have to look at what can happen in the next three to five years. Estimates on the market for satellite radio range anywhere from 15 million subscribers to 100 million. We've seen what Apple has done with its iPod, and how much momentum that gained. I think the same thing can happen with satellite radio. So I’m really optimistic with Sirius.

"Meanwhile, the airline sector has really suffered of late, and this is the kind of opportunity where I like to invest. Much of the rise in oil prices, as should be evident by recent trade, was fueled by fear and speculation, but I expect prices to decline in 2005. The airline sector has done a masterful job of converting 'fear of bankruptcy' into wage concessions. As oil prices return to a more 'normal' state, airlines will benefit greatly. The decimation of the sector will end in 2005. I'd note that I’m not talking about the discount carriers. I’m really interested in the hub and spoke airlines – the ones that are experiencing the most difficulties on an operating basis and really feel the pain of higher oil prices. American Airlines (AMR NYSE) is a favorite, as well as Delta (DAL NYSE) and Northwest Airlines (NWAC NASDAQ). Overall, I am quite bullish on the airline sector and these stocks in particular."

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