Sometimes marching to a different drummer pays off. Today may be one of those times. Murkiness extends over the economy and the market. The government just reported economic growth at a 0.2% annual rate in 2015's first quarter, well below the 1% analysts expected and the slowest pace since 2014's first quarter.
While the market indices have hit new highs this year, few observers seem excited by the market's prospects in the coming months. Uncertainty regarding the domestic economy, political gridlock in Washington, the EU's continuing struggle to find growth, China's slowing expansion -- I could go on and on -- all contribute to the view that the economy is struggling.
In such an economic climate, I think the voice of David Dreman is worth listening to. Dreman is Wall Street's most famous contrarian. Financially strong companies that get no respect from the market are the ones he favors.
In 2003, I automated the strategies of several well-known Wall Street players, including Dreman. In the intervening years, I watched his strategy while it sometimes performed very well and other times was a total dog. In 2013, when the market soared 30%, my Dreman-based strategy eked out a 5% gain. But in 2015, the S&P 500 is up a meager 2.3% year to date while my Dreman avatar is up an impressive 7%.
Investing in a Dreman-like way is not for the faint of heart, but if you find it hard to find diamonds in today's market, you might find some by looking at companies with a similar eye to how Dreman sees.
Twenty-First Century Fox (FOXA) is one such company. The owner of the Fox television networks and Twentieth Century Fox movie studio, Fox is a contrarian company because its price-to-earnings ratio of 8.1 is in the bottom 20% of the market, while its price-to-cash flow ratio is also in this netherworld of being in the bottom 20%. At the same time, the company is performing well financially, having a strong current ratio (meaning the company has little debt compared with the cash on hand), the capability to boost its dividend, and a high return on equity (49.66%). Whether you watch or even believe Fox News, you have to believe that Fox is a financially well-managed company with a stock that suggests the market is a non-believer.
If there is any type of company capable of taking you on a smooth or bumpy ride, it is an airline. My Dreman strategy is willing to fly with American Airlines (AAL), the world's largest airline, which emerged from bankruptcy in late 2013 after merging with US Airways. Like Twenty-First Century Fox, American's price-earnings ratio (10.67) and price-to-cash flow ratio are in the bottom 20%. The company's current ratio of 0.99 beats its industry average of 0.81, while its return on equity is a sky-high 172.84%.
These companies carry investment risks perhaps greater than those of many other major corporations. But the Dreman strategy suggests the rewards of such investments may be worth the risk, given the market's unfavorable view of them. This could be a good opportunity to take advantage of out-of-favor companies that are hard to see in a market covered with uncertainty.
