Contrarians find stocks with room to improve

The Ticker

May 20, 1998|By JULIUS WESTHEIMER

HAVE YOU considered "contrarian" investing?

"Most stock portfolios don't outperform the S&P 500 index when investors chase winners," says highly successful adviser David Dreman. Mr. Dreman's High Return Equity Fund is ranked No. 1 among all stock income funds, according to Lipper Analytical Services.

He adds, "The problem is that the big profits have already been made on many well-known stocks, as attractive as they seem. Many offer little opportunity for further gain."

How does the average investor avoid chasing overpriced high fliers? How do people summon courage to buy stocks that have declined?

One strategy is "contrarian" investing.

"Contrarians buy stocks that run opposite to the general consensus in Wall Street," says Dreman, adding, "There is ample data to prove that 'swimming against the tide' pays good rewards."

One way a contrarian finds undervalued, unpopular stocks is to buy issues with the lowest price-earnings (P/E) ratios. From 1970 to 1996 the average stock returned 15.6 percent a year, but stocks with P/E ratios in the bottom 20 percent returned an average 18.7 percent.

Contrarians also look for the high dividend yields. A local example is Baltimore Gas and Electric Co., rated "Good-to High Quality: Buy," by Argus Research Corp. BGE yields 5.4 percent compared to the average stock yield of 1.56 percent. Many newspaper stock tables carry daily P/E and yield figures.

WALL ST. WATCH: "The usual bull market successfully weathers a number of tests until it is considered invulnerable, whereupon it is ripe for a bust." (George Soros)

"If we had listened to the 'bears' two years ago, we would have missed almost 4,000 Dow Jones points." (Todd Market Forecast)

"The market is at an overvalued extreme and long-run returns from current stock levels will be far below average." (Bank Credit Analyst)

Pub Date: 5/20/98

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