5 stocks based on a guru's contrarian strategy

These picks are based on the approach of David Dreman, who focuses on finding the market's hidden gems.

By TheStockAdvisors Sep 12, 2013 11:57AM

Portfolio Account statement © Alamy Creativity, AlamyBy John Reese, Validea


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. 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.


Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough. 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.


Specifically, Dreman compared a stock's price to four fundamentals: earnings, cash flow, book value, and dividend yield.


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, including return-on-equity, the current ratio, and the debt-to-equity ratio.


Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. This approach isn't for the faint-of-heart.


The portfolio, which had trounced the S&P 500 ($INX) 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 companies, including several financials, emerging market stocks, and much-maligned BP. Here's a look at five of the stock in our Dreman portflio:


Canadian Imperial Bank of Commerce (CM)

BP Plc (BP)

Telecom Argentina SA (TEO)

China Mobile Limited (CHL)

Vale SA (VALE)


More from TheStockAdvisors.com:

9Comments
Sep 12, 2013 1:46PM
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Always remember - MSN / MSN Money's function is to provide as cheap of content as possible while obtaining ad revenue.  Therefore, take nothing they say seriously, ignore all the ads, and have fun using their posting system.
Sep 12, 2013 2:05PM
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Hey V_L, I see you're reading these stupid articles.  Looks like pretty good contrarian picks to me.

How about sharing with us where you put your money, as I've asked before?  Apparently you have plenty or you wouldn't have so much time to read all this crap and post every damn place on the internet.
Sep 12, 2013 6:12PM
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CRICKETS chirping are suppose to bring good luck; Maybe it's rain or something too ?? 
Dec 9, 2013 6:54PM
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Real contrarian investing means going against the current, and few investors have the courage to do that and would rather run with the herd. Contrarian investing sites I favor: , , and much of Don Coxe's commentary.
Sep 12, 2013 1:43PM
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I hear crickets chirping... don't we think we are done with stupid stock pumper articles yet? Where are the forecasts on what to do and where to go after ALL stocks bonds and bandwagons collapse? Come on experts... an expert in hindsight isn't one at all.
Sep 12, 2013 4:55PM
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It's called riding the Crest' and the Troughs in rough Seas, right Fats.

 

Hang on, me swabbies it's gonna get rough.

 

Hard to Port Mateys....har, har, har.

Sep 12, 2013 5:00PM
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I remember the ones that ran...

I remember the ones that stayed..

I remember the ones that re-allocated..

I know the ones that got even..

And I know the ones that prospered..

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