Transcript: Contrarian Investing And When To Short A Trade w/ Tim Heitman

Announcer: It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half hour about you and your money. And now, here’s Marc Lichtenfeld.

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Marc Lichtenfeld: Welcome to Oxford Club Radio. I’m Marc Lichtenfeld. Man, oh man, do we have a great show for you today. Coming up in a little bit, we’re going to talk with Tim Heitman. He is a newsletter writer for institutions. He has an institutional research product called Ideas and Insights, and this guy is a hardcore contrarian, and we’ll talk a little bit about being contrarian and what that means with Tim. I’ll explain a little bit to you what that all means as well, but very – very excited to be talking with Tim in just a few minutes.

We’re also going to be talking about some dividend stocks, previewing the J.P. Morgan Healthcare Conference, which I am about to attend. Actually, I might be even there as you’re listening to this. So I will talk about all that. If you want to get in touch with me, you want to email me some questions, comments, criticisms, compliments, whatever’s on your mind, you go to OxfordClubRadio.com and click on “Contact,” and be sure to follow me on Twitter @StocksNBoxing and I’m going to be tweeting from the J.P. Morgan Healthcare Conference. I’ve got meetings with all kinds of CEOs, analysts, bankers, you name it, and I kind of tweet what I’m seeing, what I’m hearing from the conference. So if you have any interest in healthcare investing, you definitely want to be following me @StocksNBoxing. And if you’re new to this show and you’re wondering why the heck my Twitter handle is StocksNBoxing, well, I’m a ring announcer – you may not have known that – and was actually on ESPN Friday night doing a fight from California, so that explains the boxing part. StockNBoxing.

Let’s talk for a minute about the J.P. Morgan Healthcare Conference, why you should care and what it all is. SO the J.P. Morgan Healthcare Conference is the largest healthcare investing conference, I think in the world, certainly in the United States. It’s the most important one of the year, and what happens is you get about 8,000 people who attend the conference itself, and at the conference, you get a couple of hundred companies that present – you know, there are conferences all throughout the year where they do a 20-minute presentation. They’re all available on the Web, on the companies’ investors relations websites, and then they also will break into one-on-one meetings with fund managers and the like, and like I said, there’s about 8,000 people who attend this thing. It’s jam-packed. You can’t move in the hallways.

But what also happens, because this conference has gotten so important, there are a lot of people who would like to attend the conference who can’t, who aren’t invited. You have to be a – basically a hedge fund that trades big bucks with J.P. Morgan to be able to attend the conference. So there’s probably another 10,000 people who can’t get to the conference but want to be a part of what’s going on there, and they know that all these CEOs of these biotech, med tech, pharma companies, healthcare services, you name it, all these CEOs are in one place for a few days at the same time, so all these other people show up in San Francisco and every hotel is sold out, every restaurant is sold out, I mean the Starbucks are packed.

And so you get, you know, 15,000 to 20,000 healthcare investment bankers, analysts, fund managers, traders, you name it, anybody who’s involved with healthcare investing is in San Francisco, in Union Square, for like three or four days, and so – and then, because of that, then all the other CEOs of companies that weren’t invited to the conference also come, and so they set up meetings around the city in different hotels and restaurants. And so it’s just this massive, massive sharing of information and presenting ideas and asking questions. It’s unbelievable. I get so many good ideas while I’m there, and you’d be shocked at what you hear. And it’s not – you don’t get the ideas from sitting in on a presentation and listening to a CEO, you know, address a crowd of 400 people. That’s not where you get the ideas. You get some ideas from talking to CEOs, from meeting them one-on-one, but more importantly, you get ideas from people that you meet, people that you know already.

So for example, I once randomly sat down next to a hedge fund manager, we hit it off, we’ve actually become very good friends. I see him every year. The guy’s brilliant, and we share ideas every January at the conference. You know, just standing in line in Starbucks, you’ll hear two people talking and sometimes you pick up some information. It’s unbelievable the amount of information that you can get there. So I’m very excited. I’ve got meetings set up with quite a few biotech companies, one that I’m very excited about. I’d met them last year – GW Pharma. They’re a medical marijuana company. Made a lot of money for Oxford Club subscribers last year in this stock. Looking forward to seeing what 2015 is going to bring for them. Also going to be talking with a company I’ve been in and out of many times, Compugen, an Israeli company that’s really on the very cutting edge of drug discovery, some unbelievable technology. Going to hear about their progress.

So a lot of meetings set up. I have, you know, a lot of times you end up with more meetings, your phone rings as you’re walking out of a meeting saying, “Hey, can you meet me in 15 minutes at Starbucks?” and you run over there, and so it’s some really good stuff. So be sure to follow, you know, me on Twitter, Investment U, Wealthy Retirement, which are free e-letters if you subscribe to any of our paid letters, I’m going to be writing all about this stuff for months because it’s – you get so many good ideas. There’s so much good information coming out of the J.P. Morgan conference, so I look forward to bringing all of that to you, so be sure to follow me in all the various places if you’re interested in healthcare investing.

All right, now we’re going to switch gears, talk contrarian investing with Tim Heitman when we come back. This is Oxford Club Radio. I’m Marc Lichtenfeld. Stay with us.

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Marc Lichtenfeld: Welcome back to Oxford Club Radio. I’m Marc Lichtenfeld. Boy, my next guest is a good one. We’re going to talk contrarian investing. He’s a very good contrarian investor. Been doing it a long time, 30 years, which is another way of saying he’s a lot older than me. He provides research through the institutional-focused product Ideas and Insights, but retail investors can read his work on Seeking Alpha under the name Investing 501. Very excited. Tim Heitman, thanks so much for joining us, Tim.

Tim Heitman: Thank you, Marc.

Marc Lichtenfeld: So there’s a bunch of topics I want to talk to you about, but the first I want to talk to you about is shorting because I know you have a lot of experience with – shorting used to be part of the David Tice’s Prudent Bear Fund. I did a lot of work for him. Right now is such a difficult environment to make money shorting. We’re in a six-year bull market. How should someone who’s interested in shorting approach their research and approach the trade when it is so tough and we’re in such a strong bull market?

Tim Heitman: Well, I think the first thing that the investor needs to do is really kind of decide for himself why he wants to be shorting. There’s several different types of strategies for selling stocks short, and you really need, just like on the long side, you really need to be clear as to why you’re doing it. Are you doing it as a hedge against your long positions, are you doing it because you’re trying to make a directional bet on the market because you think it’s too high and you want it to go down? You know, are you believing that these companies are a fraud that you’re looking at? So I think the first thing he has to do is really decide what his strategy is, and that will kind of dictate where he goes from there.

It’s been my experience that the most successful types of shorts involve really two different kinds, and we’re not talking about, you know, looking at the popular shorts now like the battle with Herbalife or NQ or any of these things. I think that most people should concentrate on one of two things, either a company will have liquidity problems of some sort. I mean, those are by far the most successful. Either they can’t roll over their debt or their stock is low and they’d have to issue more equity to offset the shortfall and they can’t do that, so looking for companies that have potential future liquidity problems is certainly one of them.

And the second one, which is more difficult but also somewhat successful, is looking for companies where investors are overpaying for growth, right. On your show a lot you talk about, you know, value investing, and shorting really isn’t the opposite of value investing, but what works for long investors are usually you’re underpaying for growth prospects and people are undervaluing the possibility of growth in the future of a company. Well, shorting, you’re trying to find companies where the opposite is true. So those are the kind of companies you want to focus on. I really don’t think that people should think of shorting as, well, I want it as a hedge against something. I think it should be an offensive strategy ’cause in my experience, all hedging is is really a smart-sounding way to lose money.

Marc Lichtenfeld: Well, now let me ask you about your point about, you know, shorting because you think the market is overpaying for growth, and that kind of was my point about, in my first question, that isn’t that a tough thing to do in a bull market? You know, aren’t these multiples continuing to expand in many cases?

Tim Heitman: Oh, exactly. And as much as it pains me to say this, because we’ve had conversations offline in the past, momentum is truly something that short investors really need on their side, and not from the beginning, but in a relatively short period of time. And if you think about the mechanism of how it works, a misconception for people is short sellers don’t drive the price of stocks down. You know, you hear these things on TV and on blogs about all the short sellers are driving the stocks down. That’s not what’s happening. What’s happening is the long investors who have bid up the stock have eventually become sellers to increase the supply, right. I mean, that’s really the mechanism. The stock doesn’t go down 50% because shorts pushed it down because of the volume. The stock goes down 50% because all the guys that were long don’t want to pay 40 times earnings or 30 times earnings or something like that.

So really you kind of have to let the market tell you that the bullish investors are starting to give up on the story, and frequently the best shorts come after the company starts missing earnings reports, right. It’s the – kind of the cockroach theory that after they miss once or they miss twice, and even if the stock is down, you know, 20% in a short period of time, that’s when a person interested in selling short should start to look at the company because some of that momentum is declining, and clearly there’s something going on that’s not right, and that’s the first step to try to find an idea. So you really have to kind of be almost a little late to the party when you’re short selling rather than be early, which is what most value investors tend to be.

Marc Lichtenfeld: We’re talking with Tim Heitman of Ideas and Insights and also on Seeking Alpha. Investing 501 on Seeking Alpha. So let’s sort of switch gears a little bit and talk about contrarian investing. I think, you know, a short seller probably by nature is somewhat contrarian, but when you’re looking to buy a stock, you’re looking a long investment and you’re contrarian, what are some of the things? Do you have a checklist that you look for for a contrarian investment?

Tim Heitman: Well, I kind of have a template that I use over and over again, and one of the most effective parts of that template is, you know, certainly valuation becomes a major part of the equation. I mean, that’s kind of how everybody looks at a company to start with. It looks cheap on whatever metric you want to use, but generally speaking, the market gets things right a lot of the time. So the two things that I try to do when I’m looking at a stock is I do what I call pre-mortem. Most people do postmortems where what went wrong with my investment, right. That’s kind of the mentality everybody has is, “Oh, I was long in this oil stock and now it’s down 60%. What happened? What did I miss?” I think investors would be more successful if they do what we call a pre-mortem where you look at a company and you say, okay, the market thinks all this stuff is happening. That’s why it’s priced here. If I were to buy the stock at this level, what, if my investment was wrong – went wrong, and do that ahead of time if that makes sense. So in other words, you kind of stress test your premise early, and sometimes you’ll discover that you’re not actually being contrarian at all and that the market has it right.

The other thing that I think everybody has to do is they have to do time arbitrage, which has become popular now. It wasn’t that popular 10 or 15 years ago, but I really do think that, in order to have somewhat of a differentiated view, you really need to try to look a year and a half, two, three years down the road because everyone is so focused on the current earnings or the latest news story, right. So the two most important things that I can tell people is kind of critique your investment’s failures before they happen because then you’ll have less surprises in the future. And the second thing that would really be beneficial is extend your time frame out because clearly, if the stock is cheap, the reasons that it’s cheap are pretty obvious. And focusing on that doesn’t really help you make a decision. You really have to decide is this company – you know, does it, either because of the fundamentals are strong enough it can last as long as it takes to fix it or, you know, is there a management change that can take effect? So you kind of actually have to look at it as a business, and if you owned it as a business, how would you run it and see if that’s possible under the current circumstance.

Marc Lichtenfeld: Okay, now we only have about a minute left, but I want to make sure we got to this question because you and I met at a meeting with a company’s management, and so I wanted to ask you your thoughts on how do you gauge the truthfulness of management or the quality of management?

Tim Heitman: We all – there’s an old saying, “Earnings are an opinion; cash is a fact.” So the closer the company’s cash flows match their earnings, I think that’s probably one of the best tests you can have. You know, guidance, how accurate is their guidance over time? You can compare your SEC filings with actually what they say in their conference calls. You can look at the proxies to see how they’re incentivized, but really comes down to accounting is an opinion, and the cash flows are a fact. So the closer the cash flows match kind of what the verbiage is and the story is, I think those are, I don’t want to say truthful or deceitful. It just shows that there’s less areas to enhance the positive aspects. Let’s put it that way.

Marc Lichtenfeld: All right. We’re up against the clock, so we’ve got to jump but thanks so much for joining us, and let’s definitely have you back on again later in the year.

Tim Heitman: Thank you very much, Marc.

Marc Lichtenfeld: All right. That’s Tim Heitman from Ideas and Insights. You can also read him on Seeking Alpha under the name Investing 501. We’ll come back. We’re going to talk dividend stocks and contrarian investing. This is Oxford Club Radio. Stay with us.

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Angela “Big Ang” Raiola: Hey, this is Big Ang. You’re listening to Oxford Club Radio.

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Marc Lichtenfeld: Welcome back to Oxford Club Radio. I’m Marc Lichtenfeld. We were just talking contrarian investing with Tim Heitman, and you know, one thing about contrarian investing we didn’t really get a chance to talk about is how tough it is. You really have to have some intestinal fortitude because you’re very much going against the grain when you pick contrarian stocks. You know, you’re picking stocks that nobody wants, that the market is telling you are garbage or that there’s problems with. What I have found, particularly in my newsletter, The Oxford Income Letter, is that we have done very well with contrarian dividend payers.

So for example, in 2013, we got in – early 2013, we got into Intel. At that time, everybody was saying the PC was dead, and so Intel would be – not be the kind of company you would really be thinking of because their bread and butter was the PC. They really have not done a great job getting into mobile, and had a nice dividend yield. I think it was trade – I think the yield was about 4%, maybe slightly higher at that time, and I argued that (A) I didn’t think the PC was dead, but we were going to get a nice dividend yield while we were waiting for this to play out and Intel was such a big, powerful company, great research. They were going to figure it out, and with dividend stocks, I really think you can look forward to wait it out in certain situations.

Another example we have in The Oxford Income Letter, this is very contrarian and has not worked out yet – Mattel. The stock is down, and Mattel is – you certainly know the toymaker, the maker of Barbie and a bunch of other things, and Barbie sales are down. Other of their product sales are down. The company’s struggling, no doubt about it. Meanwhile, you’re getting paid, I think it’s over 5% yield now, and is this company going away anytime soon? I don’t think so. They still generate plenty of cash flow. They’re taking steps to try to figure this out, to try to revive Barbie, try to revive these other brands. And while you’re waiting, you get this great dividend yield, and if they figure it out, you bought it so cheaply that it’s going to take off. Intel took off for us. We made 69% on Intel by the time we got out of it, and the only reason we got out of it was because they stopped raising the dividend. Wasn’t because we thought that the business had changed or we wanted to take profits.

In The Oxford Income Letter, two of our portfolios are all about dividend growth. And if a company stops raising the dividend, they can’t be in the portfolio anymore. But, you know, Mattel is still a dividend grower, and there’s quite a few stocks in The Oxford Income Letter that are – they’re all focused on dividend growth in these two portfolios, but many of them are very contrarian, and you have to be patient, you have to be able to sit with something for a while and wait for these stories to play out. Some of them happen much quicker.

For example, one of my favorite stocks we’ve ever gone into – we still own it – is Meredith Corp. They’re a magazine publisher. You know, things like, you know, Family Circle and Good Housekeeping and Rachel Ray. You know, everybody thought magazines are an ancient industry, the dinosaur, but this company has digital properties. They’re still increasing their ad revenue from these magazines. Things are still humming along, and they pay a great dividend and raise that dividend every year, and so if you can have the guts – and it does take guts. It’s not fun to sit in a company that the rest of the world hates and will consistently tell you they hate because the analysts come out with “Hold” and “Sell” ratings. You know, Jim Cramer and other pundits that you know will come out and tell you to get rid of this stock, that there’s no growth, it’s a dinosaur, blah, blah, blah. But if you have reason to believe that it’s undervalued and that things are not as bleak as the whole world is making it out to be, then it’s a great way to get a fat dividend yield, to buy a stock cheap and to make a whole bunch of money over the long run, and that’s really what we’re after with The Oxford Income Letter.

This is not a trading service. We’re not looking to hit home runs in a month. This is to generate solid, strong returns year after year after year where you’re getting income and you’re getting price appreciation and really, you know, basically making your retirement. That’s the goal, and you do that by buying cheap out-of-favor stocks with great dividend yield. So that’s what we’ve done. If you were interested in learning more about it, the OxfordClubRadio.com and click on The Oxford Income Letter and you’ll get all the information you need about it. But it’s – I believe in this method so strongly, and not every stock is contrarian in the portfolio. They’re not easy to find, but quite a few of them are, but you have to be patient and you have to be able to handle people telling you you’re wrong because, you know, not everybody can handle that. It’s not easy, and you doubt yourself, and when things don’t happen the way you think they will, you start scratching your head and going, you know, where did I get this wrong, and then suddenly, six months later, it all kind of gels and it takes off. So it’s – I strongly recommend, even if you’re not a dividend investor but you can, in your other stock picking, really think about contrarian investing. If you want to learn more about contrarian investing, also great book – best book out there is by David Dreman, is the name. He’s kind of the father of contrarian investing. But check out his books on contrarian investing if you want to learn more. They’re fantastic. And if you’re really interested in this, you won’t be able to put it down.

All right, that will do it for us this week. My thanks to Curtis Daniels, Alex Moschina, Tim Heitman, all of you for listening. Don’t forget, go to OxfordClubRadio.com, email me by clicking on “Contact” or leave some comments. We want to hear from you. Until next week, I hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.

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