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A Keen Observer of Mind and Market, David Dreman’s Lowest P/E Holdings in Review

December 13, 2013 | About:
Sally Jones

Sally Jones

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“Trouble is, human beings are poor forecasters, especially in a rapidly expanding, complex, multinational business environment. Even a 1-cent miss in the forecast sometimes results in a stock dropping 20% or more.” David Dreman , Dreman Value Management

A key point in understanding contrarian value investing is based on David Dreman’s time-tested experience — that out-of-favor, low-P/E stocks outperform higher P/E stocks over time. David Dreman is the founder and chairman of Dreman Value Management. In interviews and prolific commentary, he emits a clear, coherent signal as a rare intellect with a wealth of intuitive understanding. With a firm grasp of how human emotions impact behavioral finance, Dreman comes across as an individual who can stand alone under peer pressure, as someone who faced the dot-com frenzy and just said no, later pointing out that many of those must-have stocks declined by around 79% in the two-year window following 1999. Dreman has spoken about losing clients by doing what is best for them. Backed by more than 30 years of research via his Institute of Behavioral Finance, Guru Dreman understands the human frailty of imperfection, the psychology of overreaction, and the absurdity that people are willing to pay for a concept.

According to Dreman, the best way to identify undervalued stocks is through a low price-to-earnings approach to stock valuation. His website commentary says, “There are simply too many forces in the contemporary money management environment - peer pressures, client pressures, career pressures, psychological forces and the like-that result in following the prevailing trends and fashions. This failure to adhere to proven and disciplined investment philosophies is, we believe, the principal reason for the lackluster record of so many management firms. The countless studies on low P/E investing suggest that the cost to their clients in terms of 'investment opportunities foregone' has been enormous.”

The Dreman Value Management team practices a disciplined, bottom-up, low-P/E approach to investing. They invest in companies with low P/Es, ones that exhibit strong fundamentals and historical earnings growth. Dreman believes that cheap stocks have better downside protection.

Prior to company analysis, Dreman’s selection process starts with what he calls identifying a “beginning universe” in assessing undervalued or declining stocks with a low P/E, a low P/B and a low P/CF.

His sell discipline also keeps a strict watch on a stock's valuation rising above the market, its valuation exceeding that of its industry and a dropping price or other deterioration. Dreman’s firm attempts to mitigate risk by not overpaying for a stock and by monitoring the strength of a company’s balance sheet to be able to withstand market volatility. The firm also looks at risk in terms of earnings power, when influenced temporarily but not structurally.

The recent portfolio of Dreman Value Management shows 273 stocks, 13 of them new, with a total value of $1.10 billion, and a quarter-over-quarter turnover of 6%. The portfolio is currently weighted with top three sectors: financial services at 28.2%, industrials at 18.2% and technology at 11.3%. The stocks bought by Guru Dreman averaged a return of 12.92% over 12 months.

Here’s a look at three of the lowest P/E stocks in the Dreman portfolio.

American Axle & Mfg. Holdings Inc. (AXL) P/E: 3.80

Current Shares: 587,294

Up 86% over 12 months, American Axle & Mfg. Holdings Inc., an auto parts company, has a market cap of $1.45 billion. The current share price is around $19.20. Shares trade at a P/S of 0.50. The company does not pay a dividend.

Guru Action: Three gurus made new buys of AXL in the third quarter.

David Dreman reduced his position by 69.9%, as of Sept. 30, 2013. He sold 1,363,962 shares at an average price of $19.72 per share for a loss of 2.6%.

Dreman gained 42% buying 3,212,803 shares at an average price of $13.55 per share. He gained 12% selling 2,625,509 shares at an average price of $17.10 per share.

Tracking historical share price, revenue and net income:

1386885261564.png

Here’s more guru and insider trading of AXL.

BP PLC(BP) P/E: 6.10

Current Shares: 211,493

Up 11% over 12 months, BP PLC has a market cap of $144.46 billion. The current share price is around $46.18. Shares trade at a P/B of 1.10. The dividend yield is 4.69%.

Guru Action: David Dreman increased his position by 4.25%, as of Sept. 30, 2013. He bought 8,617 shares at an average price of $41.94 per share for a 9.7% gain.

Over a five-year history of mostly gains, Dreman gained 1% buying 778,563 shares at an average price of $45.33 per share. He gained 11% selling 567,070 shares at an average price of $41.40 per share.

Tracking historical share price, revenue and net income:

1386885546814.png

Here’s numerous trades by gurus.

No insider trading was found.

Platinum Underwriters Holdings Ltd. (PTP) P/E: 6.50

Current Shares: 89,007

Up 33% over 12 months, Platinum Underwriters Holdings Ltd. has a market cap of $1.69 billion. The current share price is around $60.39. Shares trade at a P/B of 1.00. The dividend yield is 0.50%.

Guru Action: David Dreman reduced his position by 69.03%, as of Sept. 30, 2013. He sold 198,428 shares at an average price of $58.57 per share for a 3.1% gain.

Overall, Dreman gained 75% buying 483,485 shares at an average price of $34.55 per share. He gained 39% selling 1,292,653 shares at an average price of $43.37 per share.

Tracking historical share price, revenue and net income:

1386886241025.png

Here’s more guru trading and insider selling of PTP.

Considered a pioneer in the field of contrarian value investing, Dreman Value Management was founded in 1977 by renowned contrarian investor David Dreman. Born in Winnipeg, Canada in 1936, David Dreman was influenced by his father, Joseph Dreman, a prominent trader on the Winnipeg Commodity Exchange. Dreman's most recent book, Contrarian Investment Strategies: The Psychological Edge was published in 2012 by Simon & Schuster. He is author of numerous articles and widely acclaimed books include Contrarian Investment Strategies: The Next Generation, (1998); The New Contrarian Investment Strategy, (1982); Contrarian Investment Strategy: The Psychology of Stock Market Success, (1980); and Psychology and the Stock Market, (1977). Dreman has been a columnist for Forbes Magazine for 30 years.



Check out David Dreman’s complete portfolio.

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About the author:

Sally Jones
Sally Jones writes about Real Time Picks. She says, "I truly enjoy watching the Gurus in realtime and telling their story."

Rating: 3.0/5 (2 votes)

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