Many of history’s greatest investors have had a contrarian streak, and in a recent column Validea CEO John Reese took a look at how and why go-against-the-crowd gurus like Steven Romick and David Dreman have built portfolios of unloved stocks.
“Some stocks are unloved because the companies behind them are just dogs, and everybody knows it. Key to a contrarian approach is thus separating the stocks that are unloved because of real, long-term problems from those that are unloved because of overwrought fears or apathy,” Reese writes in his latest Forbes.com column. “Dreman did this by putting stocks through a number of fundamental and balance sheet tests, and I’m sure Romick does the same. My Dreman-inspired [investment] model looks at a company’s return on equity, current ratio, debt/equity ratio, and profit margins, among other variables, for example.”
Because fundamentals and financials are key to finding good contrarian stocks, Reese says quantitative screening strategies are excellent tools investors can use to identify possible contrarian winners. “My Guru Strategies, for example, can quickly scan through thousands of stocks to separate the unloved dogs from the unloved stars,” he says. “That makes it easier to find good contrarian picks in just about any market environment — even the current one, which many say isn’t offering a tremendous amount of value.” He looks at five fundamentally sound contrarian plays his models like, including Chinese energy giant CNOOC.