When the market dives, heading for cover may not be your best bet. For those with an appetite for risk, this is a buying opportunity. Of course, blindly buying a stock that has headed south is a bad idea; many such stocks were probably overpriced or have cloudy futures and may remain underwater for some time.
But judiciously choosing fallen angels now can pay off later. I choose stocks by relying on computerized strategies I created that mirror how some of Wall Street's savviest thinkers invest. One of these strategies is based on "Mr. Contrarian," David Dreman, who made his name by going against the flow. Below are a couple of stocks my Dreman-based strategy likes at this time.
But to limit risk, I chose stocks not only earning the Dreman strategy's approval, but earning hosannas from one other strategy as well. Two strategies proclaiming a stock a good buying opportunity make it worth careful consideration.
The two stocks are GlaxoSmithKline (GSK) and Lazard (LAZ). Glaxo is a global pharmaceutical giant, while Lazard is a notable investment banking house. The Dreman strategy focuses on medium to large companies, which applies to both these names. To determine if a stock is contrarian (out of favor with the market) the stock must pass at least two of the following four tests: a P/E ratio, price-to-cash flow ratio, price-to-book ratio or price-to-dividend ratio that is in the bottom 20% of the market. Glaxo's P/E and price-to-dividend ratios are in this bottom 20% cohort, while Lazard's P/E ratio and price-cash flow ratio meet these bottom-dwelling criteria. (Lazard is part of TheStreet's Growth Seeker portfolio.)
To be sure, the company must be financially strong, as the strategy wants to see a return on equity from among the top third of the 1,500 largest-cap stocks, which is 16.85%. Glaxo's ROE is 187.3%, while Lazard's is 115.9%. Both of these ROEs is very impressive. Also in the companies' favor are strong yields: 6.15% for Glaxo and 4.21% for Lazard.
In addition to the Dreman-based plan, my strategy constructed on the foundation created by James P. O'Shaughnessy strongly favors Glaxo. The company's huge market cap of $97 billion, strong cash flow per share, large number of outstanding shares, large annual sales ($34 billion) and solid dividend all add up to a strong performance, as measured by my O'Shaughnessy strategy.
Lazard gets a nod from my Peter Lynch-modeled strategy, which focuses on the P/E/G ratio (price-to-earnings relative to growth), a measure of how well a stock is priced. A P/E/G of up to 1.0 is acceptable, and below 0.5 is a very strong showing. Lazard's P/E/G is an outstanding 0.16, indicating its stock is extremely well priced.
Given today's market, both these companies have their risks. But they are also operating well and have strong financials and well-priced stocks. These are good reasons to consider investing in these companies at this time.
