"Contrarian investing" is one of those investing terms that can mean different things to different people. Some see it as an approach that means running against the herd at all costs to try and gain an advantage over the index, while others claim it is simply a form of gambling.
As usual, the truth is probably somewhere in the middle. As a starting point, it's probably safe to say that those who try and go against the trend every time won't outperform the market in the long run.
But those investors who can closely examine business models where the market has disproportionately punished the stock price, and buy at appropriate levels, can reap some market-beating rewards. The search for yield in a low interest rate environment has bid the stock prices of banks and property trusts to long-term highs, but income can be found in more unusual places.
Life in old media yet
There is no shortage of reports (ironically, sometimes in the very media they are eulogising) that old media is dead. The launch of Netflix certainly will bring some uncomfortable truths home to the television industry in Australia over the next few years.
Likewise, the demise of newspapers has long been predicted, as advertising and classifieds became far less profitable in the face of digital disruption. But a company like Fairfax Media Limited (ASX: FXJ) may now be showing some appeal as a dividend stock.
The reason is that while revenues from classifieds have well and truly fallen off a cliff, the company has begun to see some traction from other sources. Revenue for subscriptions for the print and digital mastheads, as well as the Domain real estate advertising business and fledgling events business are all trending in the right direction.
In addition, the regional newspapers owned by Fairfax occupy a strong position in terms of advertising and subscription revenue, due to their focus on local news and issues. This local news aspect is the reason why Warren Buffett has been known to buy attractively priced regional newspapers.
For all of those ready to call the end of Fairfax, it's worth noting that net profit last year before one-off abnormal benefits were added was $157.8 million. The company also had a relatively undemanding payout ratio of 60%, with a full year dividend of $0.04 per share. With the shutting down of cost intensive printing facilities across the country, the business is now running leaner, and the payout ratio could stay stable.
If this occurs, in the next 13 months, investors in Fairfax could pick up a 7% fully franked dividend from a business that may have made the transition from a busted old media play to a profitable print and digital hybrid.
Department stores on sale
With the takeover of David Jones by South Africa's Woolworths, Myer Holdings Ltd (ASX: MYR) is the sole listed way to get exposure to Australia's once proud department store sector. The trouble is no one seems to want that exposure.
There has been no shortage of reasons to sell Myer in recent years. The arrival of cashed up foreign competitors like Zara, H&M and Uniqlo, as well as the rise of online commerce through start ups like TheIconic.com.au all conspired against the clunky Myer operating model.
Throw in a bungled leadership transition and a series of profit downgrades and it's no surprise the stock price is languishing.
But there are signs that the rot may be stopping. Chief among these is the appointment of new Myer CEO, Richard Umbers. Umbers has characterised himself as a data driven manager, and is already on record saying that the goal is to improve store by store profitability, not simply increase total sales by opening new stores.
That could include shutting older stores and committing resources to better performing ones and the online store, as well as revamping the customer loyalty program to understand customers better and create an offering that will appeal to them. The approach has been shown to work, with much of this straight from the playbook of successful North American department store, Nordstrom, Inc, which has seen its share price double in the same time as Myer's has more than halved.
Analysts are expecting full year profits to be some 28% lower than last year. If dividends are revised down by the same percentage for the next year, then investors can expect a 7% fully franked payout.
Both Fairfax and Myer have earned a place on my watchlist due to these factors, but the dividend stock below has earned a place on my "buy" list.
