David Dreman’s Top Stock Picks

David Dreman founded Dreman Value Management in 1977. He has serves as the president and chairman of the company since then. Dreman has also published a large number of scholarly articles. He writes a column for Forbes Magazine and he has written four books. Dreman discussed contrarian investment strategies in most of these books. Dreman is also the co-editor of Journal of Psychology and Financial Markets. He is on the Board of Directors of the Institute of Behavioral Finance, an organization that publishes Journal of Behavioral Finance.

Anadarko Petroleum Corporation (NYSE:APC)

Dreman recently disclosed the latest 13F holdings of his fund. Let’s take a closer look at the stocks that Dreman is most bullish about and decide whether it makes sense for investors to imitate these stock picks.

Anadarko Petroleum Corp (APC): APC is the largest position in Dreman’s portfolio. Dreman boosted his APC stakes by 2% over the fourth quarter. As of December 31, 2011, his fund had $52 million invested in this position. APC is quite popular among hedge funds tracked by us. There were 48 hedge funds with APC positions at the end of the third quarter. For example, John Paulson was the most bullish hedge fund manager about APC. Paulson & Co had $731 million invested in APC at the end of 2011. Ken Fisher and Ric Dillon were also in favor of APC.

However, we are afraid that APC is exposed to high risks. The exploration and production industry is cyclical and capital intensive. In order to succeed in this highly competitive industry, APC employs aggressive financing strategies. Its total-debt-to-equity ratio is 0.84 and its long-term debt-to-equity ratio is 0.83. It also looks a bit overpriced compared with its peers. APC has a forward P/E ratio of 18.71 and its EPS is expected to grow at an average of 13.83% per year in the next five years. This indicates that APC’s P/E ratio for 2014 is about 14.4. The main competitors of APC include ConocoPhillips (COP) and Exxon Mobil Corporation (XOM). COP’s 2014 P/E ratio is 7.4 and XOM’s is 8.2, both lower than that of APC. Although APC has higher growth rates, the price premium investors have to pay for that marginal growth is excessive. We prefer COP over APC. COP is also a good option for defensive investors who want to protect themselves from inflation. It has a decent dividend yield of 3.63%, versus 0.41% for APC.

SPX Corp (SPW): SPW is also a large position in Dreman’s portfolio. Dreman increased his position in SPW by 4% over the fourth quarter of 2011. At the end of last year, Dreman had $41 million invested in this stock. There were 15 hedge funds reported to own SPW in their 13F portfolios at the end of September. For example, Cliff Asness’ AQR Capital Management had $5 million invested in SPW. Jeffrey Vinik’s Vinik Asset Management also had $1.8 million invested in SPW.

We like SPW. In late January, Robert Bosch GmbH, the biggest auto-parts supplier in the world, announced that it would purchase the vehicle-servicing business of SPW for $1.15 billion. SPW has strong cash flows and growing earnings. It seems a bit risky though. It is faced with the severe competition in the industry. It is also exposed to the risk of the fluctuations of exchange rates and prices of raw materials. It is also less attractive compared with it major competitor, Emerson Electric Co (EMR). SPW has a forward P/E ratio of 15.25 and its EPS is expected to grow at an average of 15.65% over the next five years. Hence, its P/E ratio for 2014 is 11.4, versus 10.2 for EMR.

A few other large positions in Dreman’s portfolio include Allied World Assurance (AWH), Brinker International Inc (EAT), and Fulton Financial Corp (FULT). The main competitor of AWH is Endurance Specialty Holdings Ltd (ENH) and ACE Limited (ACE). Both ENH and ACE have lower forward P/E ratios than AWH and have higher growth rates as well. FULT also looks less attractive than PNC. PNC has a forward P/E ratio of 8.97, versus 10.84 for FULT. Though FULT is expected to grow at 10%, versus 7.57% for PNC, we do not think the growth rate is high enough to compensate the price premium. Similarly, EAT is also trading at higher multiples compared with its main competitor Darden Restaurants Inc (DRI).

It seems that the top stock picks of Dreman are a bit overvalued compared with their peers. We think investors should research carefully before investing in these stocks.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!