Three Picks for the Contrarian Investor

Stocks from a broad group of sectors were lifted by 2003's strong market rally--and most haven't fallen significantly, if at all, since then. It's difficult, then, to identify contrarian investments in this current environment. After all, the last major stock market rally we experienced--in the late 1990s--was much more focused. At the time, there were plenty of contrarian opportunities outside the then-favored tech, telecom, and media groups. In fact, it was that very disparity which led to the subsequent, and strong, outperformance of value funds. But without any screaming disparities now, can one be a contrarian?

It's a tough case to make, but we think there may be a few opportunities for those looking carefully enough. As such, three contrarian ideas we like are:

 Vanguard Health Care (VGHCX)
Okay, so it doesn't take a genius to unearth this fund, but at a time when just about everyone is dumping on big pharmaceutical stocks, why not consider a fund that has made a great living investing in them? After all, with more than $20 billion in assets, this fund doesn't have the ability to build meaningful positions in some of the sector's smaller firms. As such, its holdings include many of the giant caps, such as Pfizer (PFE) and Merck (MRK), who many are now shying away from. And given manager Ed Owens' contrarian bent, you can be sure that this fund will stay the course with these picks--and not chase the next hot thing.

 FPA New Income (FPNIX)
No contrarian list of 2004 would be complete without FPA New Income. After all, its manager, Bob Rodriguez, like most of his peers, expected this to be the year when interest-rate hikes took a bite out of bonds. The fund got off to a strong start only to fall back when a weaker-than-expected economy tempered any rate increases. That has really hurt this fund, as its duration has been hovering just above one year, well below the category average. And while such meaningful bets can be a recipe for disaster in the wrong hands, we think Rodriguez is one of the few managers who gets it consistently right.

 Harbor Capital Appreciation  (HACAX)
For the trailing five years, the typical large-growth fund has underperformed the typical large-value fund by more than eight percentage points annually. During that time, large-growth fund Harbor Capital Appreciation has more or less kept pace with its category peers. Not only do we think that it's better than that, but with the gap in valuations between so-called growth and value stocks narrowing in the past year, we think this fund (and the broader large-growth group) has the potential to make up ground in the coming years. Moreover, with several notable investors pointing to the relative attractiveness of large-cap stocks, this fund's blue-chip portfolio also stands to benefit if the market rotates away from small caps.

Will He or Won't He?
It's that time of the year again. As we begin the fourth quarter, many are already pointing to 2004 as the year when Bill Miller's 13-year streak of beating the S&P 500 will come to an end. But should you care? For the answer, Premium Members can check out my colleague Chris Traulsen's  latest take on Legg Mason Value (LMVTX).

We've also published several other updates in recent weeks that may tickle your fancy, including: Christine Benz's  analysis of whether Fidelity Magellan (FMAGX) is a good contrarian play; Gary Lyons  take on the prospects of a rebound at Dreyfus Appreciation  (DGAGX); and Jeff Ptak's  examination of whether Vanguard Primecap (VPMCX) will keep humming even as its advisor expands its menu. (In next Thursday's Fund Spy, in fact, Ptak will report on a recent visit to Primecap's offices.)