Friday, October 12, 2012
David Dreman "feels bad for investors."
Dreman is one of the world's greatest value investors. He's been analyzing stocks for more than 50 years. He literally wrote the book on contrarian investing. Contrarian Investment Strategy: The Psychology of Stock Market Success came out in 1980 – right at the end of a decade-long bear market.
If you followed Dreman's advice back then – and bought stocks when nobody else wanted them – you're likely a millionaire today.
I talked to Dreman this week on S&A Investor Radio. That's my free weekly podcast where I break down the markets and interview some of the smartest investors on Wall Street. And he explained why he feels so bad for today's investors...
During our 20-minute conversation, Dreman explained that investors continue to take money out of the market in droves. Numbers provided by research firm Investment Company Institute show investors are taking billions of dollars out of stock funds each passing week.
He thinks these investors are making the wrong move... But as a contrarian investor, Dreman sees this as a positive sign. That's why he's telling folks to buy stocks right now.
That was surprising to me. After all, Dreman is a value investor... And stocks are not cheap, trading near 15 times earnings. We have also had a great year – with the S&P 500 index up over 12% through September.
However, Dreman says there are plenty of industry-leading stocks trading below 10 times forward earnings that pay high yields. I didn't believe him – until I looked myself.
According to research engine Capital IQ, more than 15% of stocks within the S&P 500 trade below 10 times forward earnings. Of those, over 50 industry-leading stocks are paying a 2% or higher yield. I've listed a few names below. I'm sure you will recognize most of them...
There are a few things to take away from this...
First, even though the average stock in the S&P 500 is trading at 15 times earnings, there are still plenty of good stocks you can find trading at cheap valuations.
The second is learning how to be a contrarian investor. Right now, most investors are scared of stocks. Dreman talked the same sentiment about in 1980. Buying stocks nobody else wants usually leads to exceptional returns.
I suggest picking away at some of the names in the table above. Not only will you sleep well at night owning these industry leaders... But chances are good you'll have some huge winners on your hands a few years from now.
Frank spoke with Dreman this week on S&A Investor Radio, one of the top financial podcasts on iTunes. Dreman shared the metrics he uses to determine whether a stock is cheap... explained why investors are scared of today's stock market... and revealed where he's looking for new opportunities today. Listen to the episode for free here. And download episodes of S&A Investor Radio from iTunes here.
Natural gas producers are quietly breaking out... Range Resources, Southwestern Energy, and Exco touch six-month highs.
Big tobacco uptrend takes a break... Altria, Reynolds, and Lorillard sink to four-month lows.
Large-cap China fund FXI rallies to its highest level since May.
Credit card companies are going strong... Visa, MasterCard, and Discover are up 50%-plus in the past 12 months.