Dorfman on Strategy, and Why Stocks Are Still Cheap

GuruFocus.com offers an interesting interview with Bloomberg columnist and money manager John Dorfman, who called the market rally and says stocks are still cheap.

“I think the stock market was undervalued even before the recent sell off,” Dorfman tells Jacob Wolinsky. “Yes the market P/E is around 18 but only because it is based on trough earnings. Now, with the correction, valuations have come down a bit. The field is always changing and there are some companies that might be coming onto my value screen.”

Dorfman also has a positive outlook on the economy, pointing to positive leading indicators, two consecutive quarters of GDP growth, increasing auto sales, and rising technology orders. “The recession we went through was so bad, people are afraid to believe things are getting better even though they are,” he says.

Dorfman also talks about his broader investing strategy, saying he was heavily influenced by value legends Sir John Templeton and David Dreman, the latter of whom he actually worked for. “My style is very similar to David Dreman’s,” he says. “We look for stocks that are cheap based on traditional metrics such a price/earnings and price/book ratios. We look for strong balance sheets. One way I differ is that I place more emphasis on insider buying. Also, David puts more emphasis on large cap stocks, while we are more focused on mid and small cap stocks.”

Other topics Dorfman covers: his research on whether or not stocks with very low P/E ratios often turn into value traps; why he leans toward value stocks rather than growth stocks; and why balance sheet analysis is so important.

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