Contrarian investors are those that invest counter-cyclically and rely on timing the market bottom to buy out-of-favour companies. Right now, I imagine the best contrarian investors are casting a careful eye over the extremely out-of-favour mining services sector.
Down and Out
Some of the largest and previously most successful businesses in the mining services sector have fallen into oblivion, having taken on too much debt during the boom years. Investors in these companies, such as Forge Group and a number of others close to collapse, have sustained near complete loss of capital.
But there remain bright spots in the industry.
Quiet Achievers
Within the sector I'm quite a fan of those companies that have reduced exposure to coal and iron ore mining in favour of the oil and gas industry, while restricting gearing to manageable levels. Additionally, those with exposure to ongoing maintenance and service contracts are preferable to design and build contracts.
Two of my favourites are Downer EDI Limited (ASX: DOW) and Worleyparsons Limited (ASX: WOR). I've written about Downer previously and believe it remains underappreciated for longer-term growth. Worleyparsons meanwhile, has much higher exposure to mining and energy, but could still be a good long-term investment.
Solid Outlook
Worley has several earnings segments – Hydrocarbons; Minerals, Metals and Chemicals; Infrastructure and Environment; and Power. Hydrocarbons is by far the largest segment, accounting for over 70% of earnings, and over 80% of group revenue is generated outside of Australia. This is a positive in my eyes as the company is less reliant on a buoyant Australian economy and will benefit from a lower Australian dollar.
Gearing has been reduced to below 25%, extremely manageable for a company with Worley's cashflow, and a big dividend yield of over 6.5% is predicted for the 2015 financial year.
Risks include continued weakness in the oil price, a higher Australian dollar, and slowdown in global energy sector spending. However, after a 60% fall in the share price over the last 2.5 years, the rewards could soon start to outweigh the risks.
A More Robust Option
Investors are rightfully cautious about investing in the mining services sector, there is a huge amount of uncertainty and we are probably still 12 to 18 months away from discovering how bright the future will be. In the meantime, long-term investors should continue to invest in companies with sustainable advantages over peers.
