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.”

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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)

Contrarian Plays in the Oil Industry

In his RealMoney column, Validea CEO John Reese recently took a contrarian look at oil stocks.

“Oil at the moment is on a slippery slope. Prices are at their lowest in months. In fact, they are dropping during the time of year they typically rise due to higher demand in the summer months,” Reese writes, citing several factors — Iraq re-entering the oil supply business, Libya ramping up production, a slowing global economy meaning lower demand, the continuing rise of alternative energy sources — as contributing to oil’s decline.

Despite all that — or perhaps because of it — Reese says “oil stocks today are a worthy investment for those willing to take a contrarian position.” Many have been hit too hard, he contends, and he offers a few that his David Dreman-inspired contrarian strategy are high on right now. Among them: Royal Dutch Shell.

Dreman: Bond Bubble Will Hurt Many

Contrarian strategist David Dreman says a “major bubble that will hurt a lot of people” has formed in the long Treasury bond market.

“Ten-year Treasuries are yielding about 2%, while 30-year Treasuries are at 3%,” Dreman tells Morningstar.com. “Adjusting for inflation and taxes, this has almost never happened before. In the rush to Treasuries after the market collapse and financial crisis of 2008, people’s only thought was to preserve their capital. What they overlook today is that the economy is slowly coming back and the S&P 500 has more than doubled from its low. The Federal Reserve and budget deficits together have almost doubled our national debt since 2008. As unemployment gradually goes down, we are likely to see higher inflation because of the vast amounts of money printed in this country and abroad.” And, he says, a 1% increase in the yield of a 30-year bond “takes principal down more than 15%. If inflation does move higher, Treasuries, one of the best performers of the past decade, are likely to be one if the worst in the next.”

Stocks, on the other hand, are “likely to flourish in this environment,” Dreman adds. He says that improvement in the housing market as excess inventory is worked off, “whether it is a year or two longer”, should be a big boost to financials. And he says European stocks are more attractive than European bonds right now.

Dreman also discusses the psychological aspects of investing. “Unfortunately, gut instinct is the graveyard of all too many portfolios,” Dreman says. “Contrarian strategies, by contrast, are based on very strong statistical probabilities, that investors constantly repeat the psychological mistakes they make over time.” He says that value investors can avoid value traps by following a few important rules, including not buying companies that are reporting losses and having a large number of stocks in an equally weighted portfolio. He recommends holding at least 100 stocks. Dreman also warns against listening to analysts. “Although most analysts believe that if earnings come in even 3% under estimates, a stock can fall sharply, the average consensus miss since the early 1970s has been closer to 50%,” he says.

Getting Contrarian With A Market Guru

Most of history’s best investors have made their hay by going against the crowd. And in his latest column for Forbes.com, Validea CEO John Reese takes a look at some intriguing new research that contrarian guru David Dreman has published, and a Dreman-inspired strategy that has a strong track record of beating the market.

“After more than a dozen years of studying history’s most successful investment strategies, one of the most important pieces of advice I can give you is this: Don’t follow the crowd,” Reese writes. “[And] when it comes to the field of contrarian investing, perhaps no one has provided as much insightful research as Forbes’ own David Dreman.” Reese notes that in Dreman’s new book, Contrarian Investment Strategies: The Psychological Edge, Dreman updates data he had previously published, showing that contrarian strategies continued to beat the market and post solid returns in the 2000s, despite the talk of new normals and new investment paradigms.

“But some of the most intriguing parts of Dreman’s new book involve new research and analysis, particular as pertaining to investor psychology, as he gives powerful evidence as to why contrarian investing works,” Reese adds. “A big part of the explanation involves the concept of ‘Affect’ — essentially, the way that our minds automatically tag representations of objects or events with positive or negative feelings — and how numerous studies show how Affect often overrides the rational-analytic part of our brains (which should be making our investment decisions).”

Reese also discusses the “Guru Strategy” that he bases on Dreman’s earlier work, which has handily beaten the market since its 2003 inception. And he offers a handful of current picks from the model, including much-maligned oil and gas giant BP. “The London-based oil and gas giant’s name evokes a variety of negative emotions — disappointment, anger, and much worse — thanks to its role in the massive Gulf of Mexico oil spill in 2010,” Reese says. “But from an investor’s point of view, all of the negative feeling toward the company has driven its share price down well below where it should be given its fundamentals–and that’s just the sort of opportunity Dreman looks for.” To read the full article and see all the picks, click here. 

 

 

Dreman: Best Values in 30 Years

Contrarian guru David Dreman says he’s finding stocks as cheap as they’ve been at any time since 1982. Dreman tells Forbes’Steve Forbes that he’s bullish because valuations are low and companies have good cash flows and financial positions that are as strong as they’ve been in years. (A tip of the cap to Zack Miller of Tradestreaming.com for drawing our attention to the interview.) He says investors have been running from stocks because they fear volatility and they fear the economy will be in a depression-like malaise forever. He doesn’t see that happening, and thinks all the fear has created numerous opportunities.

Dreman also talks a bit about portfolio management, saying he keeps a diversified portfolio of 50 to 60 stocks, with all the stocks weighted similarly. He adds that he buys stocks below the market valuation multiple, and always sells when it reaches the market average multiple, though he may sell sooner on “very bad news”. One change he’s made since the financial crisis: He’ll sell stocks of companies that post losses, even a short-term loss, and won’t buy them again until they are turning a profit.

Dreman Likes U.S. & Canadian Markets

Contrarian guru David Dreman says he’s finding the biggest investing opportunities right now in North American stocks.

Dreman tells Canada’s Globe and Mail that over the long term — the past 25 years — the S&P 500 has basically been in a dead heat with more glamorous foreign markets. And, he adds, “There isn’t a lot of liquidity in markets in developing countries, so you’re taking extra risk for the same gain.”

Asked how he would invest $100,000 right now, Dreman says he’d buy “good-quality stocks in a portfolio large enough to diversify, or, for the average investor, an index fund.” He thinks inflation is going to be a major issue, and says stocks have traditionally gone up when inflation is coming.

Dreman also cautions against following the crowd. “On the whole, investors don’t do as well as markets,” he says. “Even money managers want to buy hot stocks, and they waive their valuation rules. It’s very hard not to go along with something that’s exciting. The Internet, for example, was going to change our lives forever — and it did. But people paid 50 times what stocks were really worth.”

 

 

Dreman on How To Combat High-Frequency Trading

Contrarian investor David Dreman say high-frequency trading is a “dark vulture” hovering over markets. And in his latest Forbes column, he offers a few tips on how individual investors can elude the beast.

“In my forthcoming book, Contrarian Investment Strategies: The Psychological Edge … I detail the dangers of HFT firms that accentuate market movements by shorting heavily when the Dow or S&P 500 rapidly drops about 2%, or buying if it suddenly rises the same amount,” Dreman writes. High-frequency traders were a big factor in the 2010 “Flash Crash”, he says, and they were also a big factor in the market’s wild swings last summer. “From July 8 to Aug. 8 the Dow fell 17.3% — 13.4% in the first six trading days of August alone,” Dreman says. “The CBOE Volatility Index (VIX), dubbed the ‘fear index,’ traded at 16 in early July but moved up to 48 by Aug. 8. Panic was everywhere. HFT did not initiate — but certainly accentuated — the size of the drop and the enormous ­increase in volatility.”

“Investors thrive on low volatility and a stable environment,” Dreman says. “Flash traders thrive on instability. The volatility they require to make major profits is what drives many tens of thousands of investors out of the marketplace.” His advice: Don’t use stop loss or sell at the market orders. “Instead, put limits on your orders either to buy or to sell,” he says. Dreman also offers a few stock and exchange-traded fund picks, including mining firm Rio Tinto PLC.

Getting Contrarian With The Dreman Approach

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 6.3% since its July 2003 inception vs. 2.8% 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 December 9, 2011 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). It has struggled in 2011, but remains far ahead of the broader market over the long haul. Since its July 2003 inception, the 10-stock Dreman-based portfolio has returned 67.7%, or 6.3% annualized, vs. 26.0%, or just 2.8%, for the S&P (through Dec. 7).

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, with a major tilt toward international stocks. Here’s the full list of its current holdings:

AstraZeneca PLC (AZN)

BP PLC (BP)

Petroleo Brasileiro SA (PBR)

Southern Copper Corporation (SCCO)

Assured Guaranty Ltd. (AGO)

Total S.A. (TOT)

Telecom Argentina S.A. (TEO)

Eni S.p.A. (E)

Triangle Capital Corporation (TCAP)

Banco Macro SA (B