The bear case for Sydney Airport Holdings Ltd

A thought on contrarian investing and the future of Sydney Airport Holdings Ltd (ASX:SYD).

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It takes an iron stomach to invest with a contrarian view.

By definition, contrarian investors are going against the crowd and investing in places the rest of us fear to tread. Billionaire investor Howard Marks is well known for his contrarian style and his take on investor psychology which offers key lessons for average investors like you and me.

You can't always profit from "popular"

The logic supporting contrarian investing is that the price of a company that 'everybody knows will do well' often already reflects the expectations for strong earnings in the future, reducing potential share price gains while increasing the risk of share price falls if expectations are not achieved.

"Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity" – Howard Marks.

Sydney Airport Holdings Ltd (ASX: SYD) seems to me a good example at the moment. The company is benefiting from its formidable market position, a well-documented boom in tourism numbers and a beautifully consistent dividend.

Everyone knows this, and the company's share price has marched up relentlessly over the last two years in recognition.

Each share in Sydney Airport Holdings currently sells for 52 times its trailing annual earnings. By comparison Auckland International Airport Ltd (ASX: AIA) sells for 33 times its annual earnings, while the wider S&P/ASX 200 (Index:^AXJO) (ASX:XJO) averages just 22 times earnings.

High stakes investing

According to Reuters consensus earnings for Sydney Airport Holdings in 2016 suggests growth of 9% which is certainly impressive. But lofty valuations reduce an investor's margin of safety and buyers should be sure to weigh up the potential risks.

Share prices can move drastically, both up and down, when investors are surprised by unexpected events. How might the market react if the company fails to meet the earnings 'consensus' for some reason?

Sydney Airport has done incredibly well for investors in the last few years and for easily identifiable reasons. However looking at the company's current price from a Howard Marks contrarian perspective, it's likely that its popularity could also create greater investing risk.

Motley Fool contributor Regan Pearson has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »