David Dreman

Top 30. Oct 25, 2001 5:32 AM

» Kirk - Doomsday It Isn't

Doomsday It Isn't

David Dreman, Forbes Magazine, 10.29.01, 12:00 AM ET
http://www.forbes.com/forbes/2001/1029/2...

U.S. stocks have suffered during past crises--and come back strongly.

For the week ended Sept. 21, stocks suffered their biggest percentage drop since the Great Depression. They have since recovered most of that loss, although more pain could lie ahead. Is this an opportunity to exit? Absolutely not. If you hold sound stocks--those trading on proven earning power, not hopes and dreams--you should stay with them. In fact, if you can stomach the volatility, now is the time to buy.

Why do I say this? Because the U.S. has faced numerous crises, some far more dangerous to our national survival than the current one, and has always overcome them.

Since World War II there have been nine major crises apart from the current one. These crises were precipitated by political factors, not investment ones. They include the 1948 Berlin blockade (risking another world war), Iraq's 1990 invasion of Kuwait (threatening the world's oil supply) and the 1998 Russian bond default (raising fears that a nuclear-armed nation would collapse in chaos).

During each crisis investors felt confused, uncertain and panicky. Nothing in their experience, they believed, would help them cope with the ominous world they faced. Typical advice they got: "Sell now, before it's too late. Save what capital you have left." This advice turned out to be completely wrong, (see table, below). It is foolish to sell into a crisis.

Crisis Investing

During nine major postwar crises, the Dow Jones industrial average has bounced back strongly a year later, with only two exceptions. Figures are with dividends included.

SEE TABLE IN STORY http://www.forbes.com/forbes/2001/1029/2...

The table measures the performance of the Dow Jones industrial average, including dividends, from the first trading day after each postwar crisis to one and two years afterward. On the whole the Dow was up smartly. The exceptions were the Soviet blockade of Berlin, which occurred during a bear market that lasted until 1949, and the 1973 oil embargo, coinciding with the postwar economy's worst bear market. One year after the nine crises, stocks had a 16.4% average return.

Of course, nobody can be so prescient as to know when the exact bottom will be reached and get 100% invested then (see story, p. 210). But even if you missed the bottoms, your gains remain impressive.

Here are five stocks that have slumped since the terrorist attacks that you should add to your portfolio:

American Express (nyse: AXP - news - people), with its large travel services arm, has especially suffered since Sept. 11. The stock is off 14%. American Express presents value at a P/E of 18 and a 1.1% yield.

Boeing (nyse: BA - news - people), the leading manufacturer of commercial jets and a major defense contractor, has announced huge layoffs. The stock is down 48% from its 12-month high as airlines, fighting for survival, cancel orders. Guess what? Travelers will return. Boeing trades at nine times trailing earnings and yields 1.9%.

Disney (nyse: DIS - news - people) was struggling with its media operations before Sept. 11, particularly as a result of ABC's hurting ad revenue. The stock dropped 28% in the week of the attacks on the fear that tourists would stay away from its theme parks for a long time. They won't. Disney is down 58% from its 12-month high. Dividend yield: 1.2%.

MGM Mirage (nyse: MGG - news - people), among the largest hotel-casino operators, has dropped 37% from its 12-month high. Once again blame this on the misguided notion that most people will continue to balk at flying to Las Vegas and other gambling venues. The stock is cheap at 12 times trailing earnings. Similarly, Harrah's (nyse: HET - news - people) has increased earnings at a 15% annual clip over the past ten years. The casino outfit's stock is down 28% from its 2001 high and carries a 15 P/E.

Prices for stocks as listed in Forbes Magazine and not in the article are:

AXP = $29
BA = $36
DIS = $20
MGG = $22
HET = $27

Visit my pay-per-click sponsors -Trend Trader & 4 Trading Books
------------------------------------------ PLEASE ----------------------\/

-- posted by Kirk

http://www.forbes.com/forbes/2001/1126/2...

Top 31. Nov 21, 2001 5:36 AM

» Kirk - Forget Running To Cash

I just read this on the paper version on the throne. Refreshing to read Dreman said he was too early to buy tech (He had HWP as a cheap value play in the Spring at $33. It should be recorded above.) Dreman advises just what I have been saying here - REBALLANCE NOW to get your allocation to target so you are buying equities cheaply.

Here is the article with editor comments.

Forget Running To Cash

David Dreman, Forbes Magazine, 11.26.01, 12:00 AM ET

Don't allow your portfolio to be dominated by fixed income. You will be sorry.

It never seems to change. Investors--amateurs and professionals alike--raised cash as the market fell sharply this year, and especially following the horrendous events of Sept. 11. The market, while still wobbly, has recovered its losses since the terrorist attacks. Lots of investors, though, continue to shun equities for the safety of money market funds, short-term bonds and other cash-like instruments. Bad enough that the paltry annual yields on some of these things lag or do little better than inflation. Bank money funds, for instance, stood at a miserly 2.4% in early November.

My last column (Oct. 29) showed that fleeing stocks is the predictable response to disturbing news, but is almost always the wrong move. You have about as much chance of timing the bottom as buying the winning lottery ticket. Markets shoot up when least expected, often sharply.

Beware of fixed-income creep. Many investors throw out their portfolios' long-term-equity-to-fixed-income ratios as the equity portion declines. This is precisely when they should be restoring the balance to their portfolios.

Such a step should allow you to make up the bear market damage more quickly when the market turns. Let's say your normal portfolio structure is 65% stocks and 35% bonds and cash, and it has fallen to 50% equity or lower. Bring the equity portion back to 65% by reducing your cash or selling some of your longer-maturity bonds. I would sell further-out maturities because interest rates now are well below their norms and are likely to rise as the economy begins to recover. Even a one-point rise in interest rates on a 20-year Treasury can cost you 11% of your investment.

[EC: Again I agree. In my newsletter and personal portfolio's I've sold 25 yr strip zeros and reallocated cash to equities to get back to my target allocation. It is not too late but the prices were much better just weeks ago.]

With fiscal and monetary stimulation being applied to the economy, there is a good chance it will bottom out in the next six months, if not sooner. While we're unlikely to see a "V" recovery, the market should, as it almost always has in the past, anticipate the upturn in business by four to six months. History also teaches us that by the time the outlook for profits becomes less murky, piling back into equities is usually too late. The market is already likely to have taken off.

What you buy is just as important as reconfiguring your portfolio. Stay away from tech stocks. Sure, many of the leading companies are down 70% or 80% from their highs, but they were grossly overvalued to start with. Mea culpa: I advocated you pick up some good tech issues on the cheap last spring (see my Mar. 5 column), but it was obviously too early. Most are trading lower today, and they may have more disappointments ahead.

[EC: Perhaps he bought the wrong technology stocks?]

One good recovery play should be small- to midcap value stocks. These stocks, which suffered lackluster market performance during the tech bubble, could reap major gains in a rising market. Look at these:

Borg Warner (44, BWA) is a leading supplier of highly engineered components and systems, primarily for the auto industry. Although earnings should be down about 12% from 2000, this is not bad relative to the earnings of other auto suppliers. Moreover, earnings could rise by roughly 20% next year if the economy begins to turn, with further gains following. Borg also sports a strong balance sheet. The stock trades at 16 times trailing earnings and yields 1.4%.

Commerce Bancshares (36, CBSH), whose 340 banks provide a solid Midwest presence, has posted increased earnings in each of the last ten years. This year should be no exception. In fact, earnings have become more stable as fee income forms a bigger part of total revenues. The stock trades at a P/E of 13 and yields 1.7%.

Dana (11, DCN), another auto-parts supplier, has been knocked down almost 60% from its 12-month high as carmakers have scaled back orders. Earnings dipped into the red for two of the last four quarters. The stock should earn only about 20 cents a share next year, but should show strong advances thereafter with a pickup in the economy.

Park Place Entertainment (8, PPE), the world's largest casino operator, has ownership or interest in 28 gaming properties worldwide. With terrorism fears and increased competition in Nevada and Mississippi, the stock is down 40% from its mid-2000 high. Nevertheless, Park Place has one of the strongest balance sheets in the gambling industry and is trading at 16 times 2002 earnings estimates.

Saks (7, SKS) is a storied department store chain that has suffered a couple of recent moneylosing quarters amid tough times for retailers generally. Regardless, the chain's sturdy balance sheet will let it ride out the storm. Saks trades at 17 times 2002's estimated earnings.

[EC: As I emailed my newsletter subscribers last week, I sold some of my large cap growth mutual fund holdings and moved the money into my favorite small cap value mutual fund. Just a small amount to get my LargeCap:SmallCap allocation where I wanted it. Large cap just had a wonderful run and that was like taking profits.]

David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Find past columns at www.forbes.com/dreman.

-- posted by Kirk

Top 32. Dec 7, 2001 8:19 AM

» Kirk - Tech Rally is not for real

David Dreman is saying take profits in Cisco, JDSU and Intel. Says fundamentals don't support prices.

Now he says to buy value Freddie Mac, US Tobacco and ???

-- posted by Kirk

Top 33. May 1, 2002 1:25 PM

» Kirk - 5/1/02 CNBC Interview

Says QQQ will probably under perform DJIA and S&P due to earnings, or lack of

Tyler asks about "Contrarian Strategies" and Dreman says:

Telecom... more time yet.

Look at Tyco or Dynergy

Look for over reaction to accounting concerns

WCOM is too close to major problems for him...

Says Value stocks will have a P/E 30% under the average market multiple .... 16 vs 24

Currently at 2% in cash... fully invested.

-- posted by Kirk

Top 34. Jul 29, 2002 6:55 AM

» Kirk - . Tech Stocks Way Down, but for Many Not Cheap Enou

.
Tech Stocks Way Down, but for Many Not Cheap Enough

7/27/2002 7:19:23 AM
By Peter Henderson

SAN FRANCISCO (Reuters) - Shares of Apple Computer Inc. (AAPL) trade for only two or three dollars more than the per-share value of the company's cash stockpile, the kind of deal that would have once led investor David Dreman to reach for his wallet.

Not any more.

"In this market you kind of throw the normal valuations aside. It's got to be ultracheap now," said Dreman, chairman of Dreman Value Management, with about $6 billion under management.

As investors sift through the wreckage of technology stocks, some 90 percent or more below their giddy highs, it would seem common sense that there must be plenty of bargains.

But value investors schooled in good deals and industry analysts hunting for a bottom see few good bets in an industry still struggling for profitability. According to these skeptics, very few companies look cheap at current levels.

Apple, for example, trades around $14 with about $11 per share in cash, but Dreman, who owns shares in the company is not increasing his stake.

"In a time like this I might want to be more high yield, very low PE (price to earnings ratio), and pretty assured of growth," he said.

The problem, Dreman and other investors say, is that the U.S. technology bubble dwarfed historical precedents and that moribund companies now have meager earnings.

"There has never been a bubble like this in appreciation," Dreman said. "Even dropping the Nasdaq 100 (index) by 80 percent doesn't bring it back. There is still a lot of water."

Take PC-maker Dell Computer Corp (DELL) , long admired for its low-cost business model and a shining success in the down market. The stock has traded at about 50 times current earnings over the last four quarters, too expensive, says Timothy Ewing, a portfolio manager at Lunn Partners in Chicago.

Software giant Oracle Corp. (ORCL) , with a PE ratio of about 23 over the last four quarters, is also not cheap, even after a 32 percent drop in its share price this year, he said.

Apple, which Ewing is considering buying, and PC maker Gateway Inc. (GTW) , are trading near cash value, but often at that level "you are really making a bet on whether the company is actually going to survive or not," he said.

Cash hordes can decline with losses, and investors would have difficulty realizing the cash, since management generally would fight attempts to disburse cash or break up their company, said Merrill Lynch technology analyst Zhen-Hong Fan.

Even so, ratios of share price to sales are hitting historical troughs in the technology sector, he said.

"The problem right now is lack of earnings," he said. The expected PE over the next 12 months is an average of about 25 for the top 100 technology companies traded in the United States, compared with a range of 10 to 30 during the pre-bubble years of 1995-1998.

"In other words, it is sort of at a reasonable valuation level, but it is not really at the floor cheap level yet," he said.

Sun Microsystems Inc. (SUNW) , trading 94 percent off its record high at $3.84 on Friday, is still around 20 times estimated calendar 2003 earnings.

Further, most tech earnings estimates do not include the expense of stock options granted to employees, a hotly debated topic. Since stock options are more prevalent now than in the early 1990s and 1980s, including their cost would make companies look even more expensive compared to past valuations, analysts said.

A Merrill study found tech earnings would be about 70 percent lower if options were expensed, as a few companies, such as Amazon.com Inc. have agreed to do.

The sole computer hardware company Merrill recommends is Hewlett-Packard Co. (HPQ) , a value trade at around 12 times estimated earnings for this fiscal year and about 9 times estimated 2003 profits.

"Many of these companies, especially those that have very strong existing market share and balance sheet and so forth, they will survive. They will be around," Fan said.

"What needs to be changed in investors' minds is they are not going to be 20-30 percent growers. Valuation needs to be adjusted. Unfortunately."

-- posted by Kirk

Top 35. Jul 29, 2002 11:24 AM

» collguy - Re: .Tech Stocks Way Down, but for Many Not Cheap Enou

Kirk-Thanks for the post. However, I noticed on your prior 5/1 post that Dreman recommended TYC and DYN since that time TYC is down 50% and DYN over 90%. His pick of WMB at $10 cost me big bucks, it's now down to $1.40.

-- posted by collguy

Top 36. Jul 29, 2002 12:28 PM

» Kirk - Re: Re: .Tech Stocks Way Down, but for Many Not Cheap Enou

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In response to message posted by collguy:

Dreman sure has hit a rough spot. I remember he was big on HP as a "value stock" in the low $30's last year... By the time it hit $11.xx last week, it was such a value stock with a dividned higher than the djia that I had to laugh at people still thinking it was a "tech stock".

It will be interesting to see how Dreman's fund has done over a full cycle...

Anyone that hasn't had some horrid stock picks these past few years is probably lying.

-- posted by Kirk

Top 37. May 27, 2003 10:19 AM

» Kirk - Dreman: One of my favorite Guru's

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I wanted to bring this to the top again as I used Dreman's book and his discussion of what happened during the great depression to apply to the bear market bottom of 2002. I don't know if it is the bottom, but two of the micro-micro cap stocks I added greatly to my positins in are up 4x since then...

I thought I should give Dreman and his book another plug as it has been so useful for me over the years.

Kirk

David Dreman is getting more press lately and for good reason. He is one of the guys I have learned from and whose style is one I try to use in my investing.

Contrarian Investment Strategies: The Next Generation: Beat the Market by Going Against the Crowd
by David N. Dreman: / Hardcover / Published 1998 / 464 pages

Kirk's Review: One of my favorite investment books!
All stock-market investors embrace the motto "Buy low, sell high." Few act accordingly. This book teaches you how. Your job is to execute! Some great historical charts of returns inside.

He runs a fund " Kemper-Dreman High Return Equity B (KDHBX)" http://biz.yahoo.com/p/k/kdhbx.html that is one of the very few funds that have beaten the S&P500 over ALL periods between 1 month and 5 years!

Unfortunatly, the fund is not cheap with a 2% annual expense ratio and the 5 yr return doesn't beat the S&P500 enough to cover the expense ratio. Of course, value was out of favor so this could be a fund of the future. Either way, I listen to what he has to say and I don't have to own his fund. He did poorly in 1999 but had an exceptional 2000 http://biz.yahoo.com/p/mp/k/kdhbx.html.

-- posted by Kirk

Top 38. Oct 17, 2005 9:44 AM

» Kirk - The Contrarian - Coffin Spiral

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10/16/2005 9:03:16 PM
From: TFF
http://www.siliconinvestor.com/readmsg.a...

The Contrarian - Coffin Spiral
David Dreman, 10.17.05, 12:00 AM ET

Military pilots call it a "coffin spiral"--when their plane is so out of control that they can't recover. That's the situation today for long-term bonds, those with maturities over ten years. The reason is that a killing turbulence of inflation is on the way, pushing bond yields up and prices down. The first sign is energy's rising price--filling up the tank is twice as expensive as two years ago--and that affects all corners of the economy.

Thousands of companies are about to suffer. Higher fuel costs jack up the price of doing business not just for obvious consumers like Delta and FedEx but also for thousands of other operators, from lawn cutters to aluminum smelters to pizza delivery guys. With unemployment now below 5%, companies will also find pressure to raise wages to keep their commuting workers whole.

Don't expect the current oil spike to be short-lived. History demonstrates that high oil prices do not fall quickly. During the 1973-74 embargo, oil reached a peak of $42 a barrel (adjusted to 2005 dollars), spurring double-digit general inflation and a painful recession. By 1975, with the embargo a memory, oil prices fell only 7% from their peak and stayed in this sharply higher range for the next five years. After the second oil shock in 1979-80, oil's price hit a new high of $98 (again, in today's money), dropping only 12% a full year later. Long Treasurys saw yields break 15%.

Nowadays conditions are worse, not better. Both the 1973-74 and 1979-80 oil shocks occurred when supply was abundant. That is, spigots were being turned down in a manipulative way. That no longer is the case. Demand for oil and gas has fully caught up with available supply. Disturbingly, the world's oil and gas reserves continue to be depleted. Demand has far outstripped new discoveries for the past 19 years. Given the increasingly sophisticated discovery techniques employed in the last ten years, it is unlikely that huge new finds are out there awaiting drilling. Of the 20 largest fields in existence today, the last significant find was in 1979 in Tengiz, Kazakhstan.

Even before the hurricane onslaught walloped the Gulf Coast's refinery system, U.S. oil-refining capacity was stretched badly. Since the early 1980s domestic refining capacity fell 10% to 17 million barrels a daily, while consumption increased 33% to 20.8 million barrels. The last large U.S. refinery was built three decades ago. Smaller, less-efficient units were closed down because of low returns and tougher federal pollution standards. Getting the necessary permits and constructing a big refinery takes ten years, so the situation is not likely to improve soon.

Buyers of long bonds are living in a fool's paradise. The 10-year Treasury, at 4.2%, trades near its lowest yields in 40 years. Buying these makes little sense. With inflation, including energy costs, running at a 3.6% annual clip, your real yield is down to 0.6%. Add in taxes and your bond income is negative. Under the circumstances it is quite plausible that the interest rate on the 10-year Treasury will climb a percentage point, causing the bond's value to immediately fall 8%. A 30-year Treasury would fall 16% in value.

What to do? Keep the bulk of your money in blue-chip stocks, which inflation likely won't harm, and the balance in short-term bonds (those due in a year or less).

-- posted by Kirk