A winning stock-picker's key to success: Be a contrarian

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Recognizing when a stock has bottomed out is at least half the battle in timing the market. That's the skill Tim James credits for winning him the title of Canada's top stock picker in 2013.

"To the extent that market bottoms are typically characterized by overly negative sentiment, I think I can recognize that," Mr. James said. "The market tends to have a tough time appropriately discounting uncertainty and assigns the worst possible outcome to situations."

Mr. James, an analyst at TD Securities, claimed the top spot in this year's StarMine Analyst Awards. StarMine, a unit of Thomson Reuters Corp., scores equity analysts based on their recommendations for the companies they cover.

Each analyst is ranked based on the return his or her buy and sell ratings would generate in a theoretical portfolio. Mr. James, who covers the transportation and aerospace industries, beat his industry benchmark by the widest margin, generating an excess return of 23.6 per cent last year.

His best call of the year was changing his rating on Air Canada's stock to a "buy" from a "hold" in June.

At the time, the stock was trading at about $2.25, and was still bitterly regarded by investors who got burned throughout the company's rocky history.

"Airlines and Air Canada in particular had a reputation for being poor investments. Many investors had taken them right off the radar screen," Mr. James said.

He rattles off a litany of disaster and misfortune that engulfed airlines over a decade: the terrorist attacks of Sept. 11, 2001; the SARS outbreak; oil prices spiking to higher than $140 (U.S.) a barrel; the 2008-09 financial meltdown.

On top of all that, Air Canada investors had to go through creditor protection, volatile financial results, liquidity problems and labour issues.

But successfully predicting the rebound of a stock or an industry requires a short memory – at least to a certain extent – Mr. James said. Investors need to allow for at least the possibility of a recovery.

"I make sure I'm not looking back too much to the boom-to-bust these airlines and aviation businesses went through. I believe it's somewhat of a new era going forward."

The industry in general has done a better job of mitigating risk and establishing sustainable profitability, he explained. At the start of 2013, airline stock valuations were only beginning to reflect that improvement.

Air Canada in particular, Mr. James said, had been making much progress in cutting costs and deleveraging by the beginning of last year. An Air Canada investor day last June – the company's first since emerging from creditor protection in 2004 – convinced Mr. James of the stock's immediate potential.

"There was an extreme undervaluation and very negative sentiment. Put all those things together and you're set up for a very nice year."

From June until the end of the year, Air Canada stock rose by 225 per cent.

A knack for anticipating a rally also came in handy last year regarding Magellan Aerospace Corp., another stock he covers. The Mississauga-based component supplier's stock had traded sideways for years, but the company was quietly growing its earnings and bringing down its debt.

Going into 2013, Magellan was trading at a very low valuation relative to pretty much any metric, Mr. James said. "I thought this is something that small-cap investors could really take to over the course of 2013."

He rated the stock a "buy" in March, after which share price increased by 135 per cent by the end of the year.

With regards to the other half of timing the market – calling a peak and anticipating a downturn – Mr. James echoes conventional wisdom that the sell decision is more difficult than the buy decision. He has greater facility diagnosing the dips, he admits. "I find that part easier than knowing when to sell a stock or knowing when to downgrade a stock."