Contrarian Approach is a simple screen which finds solid companies trading at low price ratios. The screen is inspired by David Dreman’s contrarian investment philosophy. Dreman believes strongly in market overreactions and the principle of mean reversion.
His research and professional experience shows that a diversified list of financially strong, adequately sized companies, currently out-of-favor with the market, “provide superior returns over time.”
Source
Chapters 10 and 11 of David Dreman’s book Contrarian Investment Strategies
are titled, “A Powerful Contrarian Approach to Profits” (chapter 10) and “Profiting from Investors’ Overreactions” (chapter 11).
In these chapters, Dreman lays out the guidelines for profiting in the stock market by taking advantage of other investors’ bad behaviors. He sets strict buy and sell guidelines which anyone can follow to build wealth over time.
Contrarian Approach Results
Premium Membership: The 200 stocks meeting all the core criteria with the lowest combined rank are displayed in spreadsheet format. Premium screens can be sorted by fundamentals.
Core Criteria
- Market Cap > 1 billion for Premium membership
- Current Ratio > 2
- Debt-to-Equity < 0.5
- Currency = USD
- Sector ≠ Financials, Utilities
Valuation Factors
- Rank Stocks by Price-to-Book from lowest to highest
- Rank Stocks by Price-to-Earnings from lowest to highest
- Rank Stocks by Price-to-Free Cash Flow from lowest to highest
- Combine rankings for each factor and list in order of lowest to highest
*Earnings and Free Cash Flow are based on trailing twelve month performance
*Book Value is based on most recent quarter
Implementation
Dreman recommends investing equally in a diversified group of stocks made up of 15 or more industries.
This can be accomplished by periodically investing a consistent amount in the stock with the lowest combined rank. A good sell rule would be to sell a stock when it is no longer listed in the top 25 qualifying stocks.
Follow along with our corresponding Shadow Stock Portfolio as it systematically invests based on the results of this stock screen.
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