For many investors, the past decade has been utterly forgettable. After all, the Dow Jones Industrial Average is back where it stood at the end of 1999. The Nasdaq is actually 40% lower than where it stood in the spring of 2000. This lousy backdrop for stocks seems to have had no effect on Ken Heebner, the fund manager for the CGM Focus fund (Nasdaq: CGMFX). Remarkably, this fund averaged a 16% annual gain in its first 10 years (ending 2008). That was the single best performance of any diversified stock fund manager during that period.

The only way to score such returns is to avoid the herd. If you’re buying what others are buying, then you’ll simply generate the same returns. Heebner, on the other hand, greatly prefers “losing” stocks to “winning” stocks. He knows that buying into stocks that are performing well — and are universally loved — is a losing formula.

Since the middle of 2008, Heebner hasn’t been outperforming his index benchmarks for a fairly straightforward reason. The market started plunging at that point and then went on to post a stunning rebound that saw the S&P 500 double in value from March 2009 to March 2011. Heebner needs a fairly benign backdrop for stocks for his contrarian approach to really shine. If the market in 2012 is simply a boring sideways-moving market, as may be the case, then he may be set for another run for outperformance.

So it pays to keep tabs on his latest portfolio moves. And judging by some freshly-released data, Heebner is again loading up on a pair of contrarian plays. In the most recent quarter, his firm, Capital Growth Management, bought 6.9 million shares of Morgan Stanley (NYSE: MS) and 18 million shares Delta Airlines (NYSE: DAL). It’s no coincidence both of these stocks have underwhelmed investors for much of 2011. Heebner is betting that both of these stocks will post a major rebound in coming quarters and years. Here’s the likely thinking behind his moves.

Morgan Stanley
This investment bank has seen its stock fall more than 50% from its 52-week high and trades for just half of book value. To be sure, it’s been a bumpy ride as Morgan Stanley — like its peers — has never fully recovered from the economic crisis of 2008. A still-weak economy in 2011 means earnings per share (EPS) is on track to fall 35% this year to about $1.60. The crisis in Europe has led analysts to trim their forecasts for 2012 as well, as the consensus EPS view has fallen from $2.76 to $2.13. Yet this lowered forecast may represent a bottom, even with Europe still in crisis mode.

Analysts at Collins Aikman just upgraded the stock from “Hold” to “Buy,” with a $21 price target (implying more than 50% upside). They say the European doomsday scenario, which would surely put even more pressure on banks, simply won’t come to pass. “We emphasize up-front our premise that EU policy-makers will, eventually, craft a response that prevents a disorderly reconfiguration of the Euro bloc,” they note. Even as they have modestly lowered their profit outlook for Morgan Stanley, they also say “the recent high volatility of MS’s quarterly core earnings should begin to subside in 2012.” They see EPS approaching $3 by 2013. Shares trade for less than five times this view.

Analysts at Merrill Lynch have an even loftier $24 price target on the stock and they suggest the European crisis brings opportunity. Morgan Stanley, along with its domestic peers, lost market share in the global investment banking (IB) industry after 2008, as they had to focus resources on cleaning up the mortgage mess. Now, the European banks are the ones facing a major distraction. “Applying similar logic today, with Europe a key area of concern, U.S. banks could be positioned to retake IB share,” the Merrill analysts write.

Delta Airlines
The timing of Heebner’s new investment in this airline carrier is a bit curious. Oil prices are on the rise, and a move toward $110 or $120 oil would likely create real trouble for the entire airline industry. Still, Delta remains the industry’s most impressive operator. Before oil prices began their recent rise, I suggested Delta’s shares looked like a double during the course of the next 12 months.

It’s time to extend the potential time frame for such upside, as shares won’t strongly rally until oil prices cool or the major global economies look healthier. As I wrote in late July, “When fears of a global meltdown recede, investors would happily pay up to acquire Delta’s shares with a 10% free cash flow yield. This math would mean shares rise 150% from current levels.” Heebner presumably shares this bullish upside forecast.

It’s worth noting that strong cost controls have led analysts to actually boost EPS forecasts since my late July analysis. The 2011 consensus EPS forecast has risen to $1.22 and the 2012 EPS forecast has risen to $2.17. Let’s assume analysts are being too bullish, and these forecasts need to fall back to where they stood 90 days ago. Shares are still extremely cheap based on that lower EPS scenario, trading at roughly four times projected 2012 profits.

Risks to Consider: As noted, Heebner’s contrarian approach works best in calm markets, so he’s unlikely to outperform the benchmarks if the markets are in turmoil — or rally sharply — in 2012.

Action to Take–> Delta and Morgan Stanley share a common trait. They control major market share in their industries and have taken steps to ensure they will remain healthy in 2012 and beyond, regardless of the economic climate. The fact they both sport mid single-digit multiples on projected 2012 profits tells you that they are unloved, and valued at generational lows. That’s the set-up Heebner typically favors, and it’s the kind of set-up that could deliver a double or greater to investors with the appropriate stomach for risk.