Dreman: Don’t Let The Fed Keep You Down

Contrarian guru David Dreman says the Federal Reserve has been playing a dangerous, unsuccessful game by keeping interest rates so low for so long. But he says there are ways for investors to cure the “easy money hangover.”
Continue reading

Reese on Dreman’s Market-Beating Contrarian Approach

In an interview with Steven Halpern for MoneyShow.com, Validea CEO John Reese recently talked about the Guru Strategy he bases on noted contrarian investor David Dreman.

Continue reading

Think Like a Contrarian with the Dreman Strategy

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the David Dreman-inspired strategy, which has averaged 6.5% annualized returns  since its inception more than 10 years ago, beating the S&P 500. Below is an excerpt from today’s newsletter, along with several top-scoring stock ideas based on the Dreman-based investment strategy.

Continue reading

Dreman Says The Bull Has Years Left

While many are worrying about a bear market, contrarian guru David Dreman thinks the bull has a long ways to run — though not without some bumps along the way.

Continue reading

The Dreman Approach: A Contrarian Guide to Beating the Market

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the David Dreman-inspired strategy, which has averaged annual returns of 7.2% since its July 2003 inception vs. 5.3% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Dreman-based investment strategy.

Taken from the August 16, 2013 issue of The Validea Hot List

Guru Spotlight: David Dreman

While all the gurus I follow have built their fame and fortunes using different investment approaches, there is at least one striking similarity that most — if not all — of them share: They are contrarians. When the rest of Wall Street is zigging, they are zagging; when Wall Street zags, they zig. By having the strength of conviction to march to their own drummers and not follow the crowd, they have been able to key in on the types of strong, undervalued stocks that have made them — and their clients or shareholders — very happy.

But while most of these gurus are contrarians, one in particular is known for being, well, the most contrarian: David Dreman. Throughout his long career, Dreman has sifted through the market’s dregs in order to find hidden gems, and he has been very good at it. His Kemper-Dreman High Return Fund was one of the best-performing mutual funds ever, ranking number one out of 255 funds in its peer groups from 1988 to 1998, according to Lipper Analytical Services. And when Dreman published Contrarian Investment Strategies: The Next Generation (the book on which I base my Dreman strategy) in 1998, the fund had been ranked number one in more time periods than any of the 3,175 funds in Lipper’s database.

Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough, finding winners in such beaten-up stocks as Altria (after the tobacco stock plummeted amid lawsuit concerns) and Tyco (which had been hit hard by an embarrassing CEO fiasco).

How — and why — did Dreman manage to pick winners from groups of stocks that few other investors would touch? Well, Dreman, perhaps more than any other guru I follow, is a student of investor psychology. And at the core of his research is the belief that investors tend to overvalue the “best” stocks — those “hot” stocks everyone seems to be buying — and undervalue the “worst” stocks — those that people are avoiding like the plague, like Altria and Tyco. In addition, he also believed that the market was driven largely by how investors reacted to “surprises”, frequent events that include earnings reports that exceed or fall short of expectations, government actions, or news about new products. And, he believed that analysts were more often than not wrong about their earnings forecasts, which leads to a lot of these surprises.

When you put those factors together, you get the crux of Dreman’s contrarian philosophy. Surprises happen often, and because the “best” stocks are often overvalued, good surprises can’t increase their values that much more. Bad surprises, however, can have a very negative impact on them. The “worst” stocks, meanwhile, are so undervalued that they don’t have much further down to go when bad surprises occur. But when good surprises occur, they have a lot of room to grow. By taking a “contrarian” approach — i.e. targeting out-of-favor stocks and avoiding in-favor stocks — Dreman found you could make a killing.

Specifically, Dreman compared a stock’s price to four fundamentals: earnings, cash flow, book value, and dividend yield. If a stock’s price/earnings, price/cash flow, price/book value, or price/dividend ratio was in the bottom 20% of the market, it was a sign that investors weren’t paying it much attention. And to Dreman, that was a sign that these stocks could end up becoming winners. (In my Dreman-based model, a firm is required to be in the bottom 20% of the market in at least two of those four categories to earn “contrarian” status.)

But Dreman also realized that just because a stock was overlooked, it wasn’t necessarily a good buy. After all, investors sometimes are right to avoid certain poorly performing companies. What Dreman wanted to find were good companies that were being ignored, often because of apathy or overblown fears about the stock or its industry. To find those good firms, he used a variety of fundamental tests. Among them were return on equity (he wanted a stock’s ROE to be in the top third of the 1,500 largest stocks in the market); the current ratio (which he wanted to be greater than the stock’s industry average, or greater than 2); pre-tax profit margins (which should be at least 8 percent), and the debt/equity ratio (which should be below the industry average, or below 20 percent). By using those and other fundamental tests in conjunction with his contrarian indicator tests (the low P/E, P/CF, P/B, and P/D criteria we reviewed before), he was able to have great success finding strong but unloved firms that had the potential to take off once investors caught on to their true strength.

Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. “A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest,” he wrote in Contrarian Investment Strategies. “People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower. Further, the event triggering the crisis is always considered to be something entirely new.” Dreman’s advice: “Buy during a panic, don’t sell.”

This type of contrarian approach isn’t for the faint-of-heart. You never know exactly when fear will subside and investors will wake up to a bargain they’ve been overlooking. And that means the stocks this model targets may very well keep falling in the short term after you buy them, which, for my Dreman-based portfolio, is what happened during the recent financial crisis and bear market. The portfolio, which had trounced the S&P from its inception through 2006, fell on tough times as fears about the economy grew, lagging the S&P by about 15 percentage points in both 2007 and 2008.

But, as fears abated and the crisis passed, investors began to recognize the strong stocks they’d been shunning. And the Dreman portfolio reaped the benefits, returning more than 37% in 2009 (vs. 23.5% for the S&P) and 23.1% in 2010 (vs. 12.8% for the S&P). Since its July 2003 inception, the 10-stock Dreman-based portfolio is well ahead of the S&P 500, returning 100.8%, or 7.2% annualized, vs. 68.5%, or 5.3 %, for the S&P (through Aug. 14).

As you might imagine, the portfolio will tread into areas of the market others ignore because of its contrarian bent. Right now, its holdings include some very unloved firms, including several financials, emerging market stocks, and much-maligned BP. Here’s the full list of its current holdings:

Canadian Imperial Bank of Commerce (CM)

BP Plc (BP)

Telecom Argentina SA (TEO)

American Capital Agency Corp. (AGNC)

China Mobile Limited (CHL)

Vale SA (VALE)

Annaly Capital Management, Inc.(NLY)

Petroleo Brasileiro SA (PBR)

American Capital, Ltd. (ACAS)

Royal Dutch Shell Plc (RDS.A)

Dreman: Stocks And Housing Are Places To Be

Contrarian guru David Dreman remains concerned about major inflation, and says investors should thus focus on stocks and the housing market.

In a column for Forbes, Dreman says that economic improvements and the realization that higher interest rates will come as the economy improves have driven the stock market’s performance recently. “Currently a one-percentage-point rise in yield for a 30-year bond will reduce its price by 17%. A three-point increase in yield will knock its price down 41%,” he writes. “With financial crisis redux fears finally subsiding, investors are looking for places to increase their capital.”

As for inflation, Dreman says that “if massive amounts of money printing by the Federal Reserve and other central banks around the world ignite inflation, the stock market will be one of the best places to be.”  He notes that German inflation in the 1920s and Brazilian inflation since 1945 pummeled those countries’ currencies but that stocks “in both cases produced gains far ahead of inflation.”

Dreman recommends several index funds that he likes, and says that, aside from stocks, he thinks the best asset may be housing. “If I’m right about inflation, it will provide a very effective hedge that comes with leverage,” he writes. “Mortgages can be gotten with only 20% down, and you can finance the rest at today’s rock-bottom rates. This should enhance your overall return significantly and lighten your tax load.”

bookad

 

 

 

The Dreman Approach: Thinking Contrarian to Beat the Market

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the David Dreman-inspired strategy, which has averaged annual returns of 6.9% since its July 2003 inception vs. 4.0% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Dreman-based investment strategy.

Taken from the September 14, 2012 issue of The Validea Hot List

Guru Spotlight: David Dreman

While all the gurus I follow have built their fame and fortunes using different investment approaches, there is at least one striking similarity that most — if not all — of them share: They are contrarians. When the rest of Wall Street is zigging, they are zagging; when Wall Street zags, they zig. By having the strength of conviction to march to their own drummers and not follow the crowd, they have been able to key in on the types of strong, undervalued stocks that have made them — and their clients or shareholders — very happy.

But while most of these gurus are contrarians, one in particular is known for being, well, the most contrarian: David Dreman. Throughout his long career, Dreman has sifted through the market’s dregs in order to find hidden gems, and he has been very good at it. His Kemper-Dreman High Return Fund was one of the best-performing mutual funds ever, ranking number one out of 255 funds in its peer groups from 1988 to 1998, according to Lipper Analytical Services. And when Dreman published Contrarian Investment Strategies: The Next Generation (the book on which I base my Dreman strategy) in 1998, the fund had been ranked number one in more time periods than any of the 3,175 funds in Lipper’s database.

Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough, finding winners in such beaten-up stocks as Altria (after the tobacco stock plummeted amid lawsuit concerns) and Tyco (which had been hit hard by an embarrassing CEO fiasco).

How — and why — did Dreman manage to pick winners from groups of stocks that few other investors would touch? Well, Dreman, perhaps more than any other guru I follow, is a student of investor psychology. And at the core of his research is the belief that investors tend to overvalue the “best” stocks — those “hot” stocks everyone seems to be buying — and undervalue the “worst” stocks — those that people are avoiding like the plague, like Altria and Tyco. In addition, he also believed that the market was driven largely by how investors reacted to “surprises”, frequent events that include earnings reports that exceed or fall short of expectations, government actions, or news about new products. And, he believed that analysts were more often than not wrong about their earnings forecasts, which leads to a lot of these surprises.

When you put those factors together, you get the crux of Dreman’s contrarian philosophy. Surprises happen often, and because the “best” stocks are often overvalued, good surprises can’t increase their values that much more. Bad surprises, however, can have a very negative impact on them. The “worst” stocks, meanwhile, are so undervalued that they don’t have much further down to go when bad surprises occur. But when good surprises occur, they have a lot of room to grow. By taking a “contrarian” approach — i.e. targeting out-of-favor stocks and avoiding in-favor stocks — Dreman found you could make a killing.

Specifically, Dreman compared a stock’s price to four fundamentals: earnings, cash flow, book value, and dividend yield. If a stock’s price/earnings, price/cash flow, price/book value, or price/dividend ratio was in the bottom 20% of the market, it was a sign that investors weren’t paying it much attention. And to Dreman, that was a sign that these stocks could end up becoming winners. (In my Dreman-based model, a firm is required to be in the bottom 20% of the market in at least two of those four categories to earn “contrarian” status.)

But Dreman also realized that just because a stock was overlooked, it wasn’t necessarily a good buy. After all, investors sometimes are right to avoid certain poorly performing companies. What Dreman wanted to find were good companies that were being ignored, often because of apathy or overblown fears about the stock or its industry. To find those good firms, he used a variety of fundamental tests. Among them were return on equity (he wanted a stock’s ROE to be in the top third of the 1,500 largest stocks in the market); the current ratio (which he wanted to be greater than the stock’s industry average, or greater than 2); pre-tax profit margins (which should be at least 8 percent), and the debt/equity ratio (which should be below the industry average, or below 20 percent). By using those and other fundamental tests in conjunction with his contrarian indicator tests (the low P/E, P/CF, P/B, and P/D criteria we reviewed before), he was able to have great success finding strong but unloved firms that had the potential to take off once investors caught on to their true strength.

Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. “A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest,” he wrote in Contrarian Investment Strategies. “People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower. Further, the event triggering the crisis is always considered to be something entirely new.” Dreman’s advice: “Buy during a panic, don’t sell.”

This type of contrarian approach isn’t for the faint-of-heart. You never know exactly when fear will subside and investors will wake up to a bargain they’ve been overlooking. And that means the stocks this model targets may very well keep falling in the short term after you buy them, which, for my Dreman-based portfolio, is what happened during the recent financial crisis and bear market. The portfolio, which had trounced the S&P from its inception through 2006, fell on tough times as fears about the economy grew, lagging the S&P by about 15 percentage points in both 2007 and 2008.

But, as fears abated and the crisis passed, investors began to recognize the strong stocks they’d been shunning. And the Dreman portfolio reaped the benefits, returning more than 37% in 2009 (vs. 23.5% for the S&P) and 23.1% in 2010 (vs. 12.8% for the S&P). Since its July 2003 inception, the 10-stock Dreman-based portfolio has nearly doubled the S&P 500, returning 82.6%, or 6.8% annualized, vs. 43.7%, or just 4.0%, for the S&P (through Sept. 9).

As you might imagine, the portfolio will tread into areas of the market others ignore because of its contrarian bent. Right now, its holdings include some very unloved firms, including several financials and one from China. Here’s the full list of its current holdings:

HollyFrontier Corp. (HFC)

AOL, Inc. (AOL)

CYS Investments Inc. (CYS)

Assurant, Inc. (AIZ)

Banco Santander, S.A. (SAN)

Statoil ASA (STO)

Cosan Limited (CZZ)

Yanzhou Coal Mining Co. (YZC)

Bank of America Corp. (BAC)

Exelis Inc. (XLS)