Contrarian investor Larry Pitkowsky of GoodHaven Capital Management has showed that it's no easy feat to be successful at the strategy. He shared his three big contrarian wins, as well as one of his large missteps, at GuruFocus' Value Conference this past Friday in Omaha.
One of Pitkowsky's big early wins was Microsoft (MSFT, Financial), a stock that is largely back in the good graces of the market. However, when GoodHaven initiated its position, investors feared that Google (GOOG, Financial) (GOOGL, Financial) Docs would kill Microsoft's Office franchise, as the Doc segment was essentially a free version of Word, PowerPoint and Excel. In 2011, Microsoft's price was in the low to mid-$20s, and management was widely considered incompetant due to consumer product failures. This fear was a win for GoodHaven. The stock has doubled since 2011 and revenue is still growing.
Pitkowsky's second win was a risky one in Spectrum Brands (SPB, Financial), which had come out of bankruptcy court in 2011, and the stock languished to the mid-$20s. Spectrum manufactures batteries, herbicides, insecticides, battery-powered lighting and grooming products, among other consumer products. The consensus was that Spectrum's brands were not worth much despite its products holding the No. 1 and 2 positions in its categories, Pitkowsky said. Four years later, the company has astute deal-making and has quadrupled its stock price.
Another was HP Inc. (HPQ, Financial) prior to its split up. GoodHaven began to buy the stock aggressively after the price dropped from the $50s to $20s. The hardware business struggled as analysts hypothesized that customers would buy fewer PCs and printers, Pitkowsky said. The firm sold half of its position at about $40 a year ago, but is still involved with the business. Ultimately, GoodHaven’s thesis was correct: The business stabilized and may be starting to grow on the enterprise side.
One stock that burned the firm, however, is Ocwen Financial (OCN, Financial), which has seen its stock plunge by 80% over the past year. The financial services holding company services and originates mortgage loans. Pitkowsky said the stock was down 40% when he initiated a position and believed the business was predictable. It turned out, however, that Ocwen had complicated accounting and affiliate relationships, and would embody the notion that “there is never just one cockroach.”
On Feb. 29, Ocwen reported a $247 million annual loss for 2015 and delinquencies at 13.7% for the fourth quarter. The company also settled with the Securities and Exchange Commission in January for misstating its 2013 and 2014 financial results. Ocwen paid a $2 million fine after an SEC investigation found the company inaccurately told investors it independently valued assets at fair value under GAAP standards. The company misstated net income for the last three quarters of 2013 and first quarter of 2014. Stock buybacks turned out to be a smokescreen and management was “dishonest and dishonorable.” The moral of the story, Pitkowsky said, is a depressed stock price is not enough by itself to make an investment.
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