3 Stocks for Contrarian Investors

Contrarian investing is simple in concept. Oppose the crowd. By doing so, you'll hopefully buy low and sell high. As Warren Buffett described it a year ago in a New York Times editorial, "Be fearful when others are greedy, and be greedy when others are fearful."

The trouble is, it's not always easy to tell where the crowd stands. The S&P 500-stock index is up more than 55% from the 13-year low it hit in March (greed), but is closer in points to that low than to its all-time high hit in October 2007 (fear), and stands now about where it did at the start of the month (indecision). According to a new Wall Street Journal/NBC News poll, only 22% of Americans think economic conditions will worsen over the next year (greed), but that's up from 20% last month (fear), and 33% think things will stay the same (indecision).

As near as I can tell by looking at valuations and economic trends, investors at the moment are too greedy for stocks and gold and too fearful of dollars. Those who agree (there are few, if I'm being properly contrarian) might consider betting on the ProShares Short S&P 500 fund (SH), the PowerShares DB Gold Short ETN (DGZ) and the PowerShares DB U.S. Dollar Index Bullish fund (UUP).

But this being a column that focuses on long-term investing rather than short-term bets, I recently searched for stocks suitable for contrarian investors. I screened for companies with meager price/earnings ratios, lagging year-to-date returns and few "buy" recommendations on Wall Street. Since contrarianism shouldn't be mistaken for recklessness, I avoided companies with worrisome amounts of debt. Below are three companies the screen produced.

Will Verizon (VZ) offer the iPhone in 2010? As a New York City resident and fan of the Apple (AAPL) gadget, I hope so, because it's lousy having a phone that does everything well except make phone calls. Verizon shareholders needn't dwell on the matter, though. AT&T (T) has been the exclusive U.S. carrier of the iPhone since June 2007, but Verizon stock has performed better over that stretch. Verizon's challenges are well-known: Landline phones are slowly disappearing and the corporate telephone business has slowed with the economy. The wireless phone business is lucrative but increasingly competitive and Verizon's fiber-optic television and Internet service is a difficult sell amid tight consumer spending. Still, overall sales are stable and Verizon seems underpriced at 12 times earnings, with a giant dividend yield of 6.2%.

Big drug makers are tasting their own medicine, you might say. In "The Truth About the Drug Companies" (2004 Random House), former New England Journal of Medicine editor Marcia Angell presented a damning argument that the industry had for years focused more on copycat pills and marketing than on research and innovation. Product pipelines in the industry now look thin and stocks are modestly priced to reflect looming patent expirations. Most Big Pharma companies are spending their considerable cash stockpiles to buy drugs that are in the final stages of development, or else to snap up companies that make such drugs. Bristol-Myers Squibb (BMY) will soon lose U.S. patent protection for Plavix, a blood-thinner and source of more than a quarter of the company's recent sales. Management this year spent $2.4 billion, most of its available cash, to buy Medarex, a Princeton. N.J., biotech with cancer drugs in development. Bristol-Myers sells for 11 times earnings. It, too, has a huge dividend: 5.7%. Payments look plenty affordable for the next few years, which isn't a guarantee the company will keep making them. Pfizer (PFE) earlier this year halved its seemingly affordable dividend to help pay for its $68 billion cash-and-stock purchase of rival Wyeth.

Hope you like corn. America will produce 12.8 billion bushels of it this year, nearly a half-billion bushels more than forecast, according to the USDA. Add that to corn left over from last year and stockpiles will rise to a record 14.5 billion, likely holding down prices. Archer Daniels Midland (ADM) stands to make good money processing the stuff, and low corn prices boost profit margins for its corn sweeteners and ethanol. Also, soybeans are more plentiful in the U.S. than in South America at present, so ADM stands to profit from strong demand for exports. Profits are down from last year, when grain inflation suddenly boosted the value of food processors' inventories, but shares seem cheap at 12 times earnings, and over the long term, the world's appetite for processed food seems sure to increase.