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In this edition of Watchlist Wednesday, we highlight five of the top stocks qualifying for the Contrarian Approach screen.
The Contrarian Approach is inspired by David Dreman’s contrarian investment philosophy, which he describes in the book Contrarian Investment Strategies.
Contrarian Approach is a simple screen which finds solid companies trading at low price ratios. Dreman believes strongly in market overreactions and the principle of mean reversion.
His research and professional experience shows that a diversified list of financially strong, adequately sized companies, currently out-of-favor with the market, “provide superior returns over time.”
Qualifying stocks for this screen all have a Current Ratio > 2 and Debt to Equity < 50%. The stocks are equally weighted by the following ratios:
- Price to Book
- Price to Earnings
- Price to Free Cash Flow
Here is a breakdown of five large-cap stocks with the lowest combined rank as found on The Stock Market Blueprint:
- Valero Energy Corp. (VLO) – Valero Energy Corporation operates as an independent petroleum refining and marketing company in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. It operates through two segments, Refining and Ethanol. The company also operates a 50-megawatt wind farm; convenience stores; filling stations, as well as truckstop, cardlock, and home heating oil facilities; and credit card business. Valero Energy Corporation was founded in 1955 and is headquartered in San Antonio, Texas.
- Current Ratio: 2.2
- Debt to Equity: 36%
- Price to Book: 1.2
- Price to Earnings: 7.6
- Price to Free Cash Flow: 12.7
- Combined Rank: 6
- Cisco Systems, Inc. (CSCO) – Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. The company serves businesses of various sizes, public institutions, governments, and communications service providers. Cisco Systems, Inc. sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California.
- Current Ratio: 3.3
- Debt to Equity: 46%
- Price to Book: 2.3
- Price to Earnings: 13.8
- Price to Free Cash Flow: 17.1
- Combined Rank: 16
- Lam Research Corporation (LRCX) – Lam Research Corporation designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits. The company offers its products in the United States, Europe, Taiwan, Korea, Japan, China, and Southeast Asia. Lam Research Corporation was founded in 1980 and is headquartered in Fremont, California.
- Current Ratio: 3.0
- Debt to Equity: 42%
- Price to Book: 2.4
- Price to Earnings: 17.1
- Price to Free Cash Flow: 16
- Combined Rank: 20
- Qualcom, Inc. (QCOM) – QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The company also develops and offers products for implementation of small cells, as well as for data centers; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; development, and other services and related products to the United States government agencies and their contractors; and software products that enable wireless learning for educators and students. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California.
- Current Ratio: 2.9
- Debt to Equity: 40%
- Price to Book: 2.7
- Price to Earnings: 17.0
- Price to Free Cash Flow: 21.6
- Combined Rank: 22
- VMWare, Inc. (VMW) – VMware, Inc. provides virtualization and cloud infrastructure solutions in the United States and internationally. It sells its products through distributors, resellers, system vendors, and systems integrators. The company was incorporated in 1998 and is headquartered in Palo Alto, California. VMware, Inc. is a subsidiary of EMC Corporation.
- Current Ratio: 2.4
- Debt to Equity: 0%
- Price to Book: 3.1
- Price to Earnings: 26.2
- Price to Free Cash Flow: 13.3
- Combined Rank: 28
Dreman recommends investing equally in a diversified group of stocks made up of 15 or more industries. This can be accomplished by periodically investing a consistent amount in the stock with the lowest combined rank.
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Mitchell Mauer is the Founder of TheStockMarketBlueprint.com. The Stock Market Blueprint is a free site that finds value stocks for investors building long-term wealth. The site’s investment philosophy is anchored in principles established by Benjamin Graham and his most reputable followers over the last 100 years.