Investing guru David Dreman has written extensively about the types of metrics investors should examine when searching for value stocks. In his best-selling book, Contrarian Investment Strategy: The Psychology Of Stock Market Success, he outlines four principal ratios that historical studies reveal to be most reliable. They are: dividend yield, price-to-earnings, price-to-book and price-to-sales ratios. There are, of course, no absolute values associated with these numbers, and different sectors tend to trade within their own parameters. Notwithstanding that, over the long term, those stocks with high yields and low P/E, P/B and P/S ratios have tended to outperform the rest of the stock-investing universe.
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Here are five stocks, each of which boast all of Dreman's key variables:
Telecom Italia (NYSE: TI) is Italy's largest fixed line, mobile phone and internet service provider. The stock pays an annual dividend of just below 4% and trades with a 9.74 P/E ratio. P/B on the stock is 0.81 and P/S is 0.75. The company recently spun off a broadband subsidiary to Spanish telecom giant Telefonica SA for more than EUR1 billion.
Three Utilities With 'Buy' Fundamentals
Portland General Electric (NYSE: POR) provides electricity and natural gas to Oregon residents. The company's stock has a 0.94 P/B ratio and a 0.82 P/S. It currently trades with a one-year trailing P/E multiple of 12.62 and a 5.26% dividend yield.
Ameren Corp. (NYSE: AEE) is in the same business as Portland General Electric but operates in the Midwestern states of Illinois and Missouri. The P/E on AEE is 9.21 and the dividend yield is 6.09%. P/B is 0.76 and P/S is 0.82. The company recently reduced staff by 300 positions to cut costs and stay competitive.
Pepco Holdings (NYSE: POM) is a Mid Atlantic-based utility with a 6.95% dividend yield and a 12.95 P/E ratio. POM stock trades at 0.81 times book value and just 0.36 times sales.
Investment Trust With Numbers
Many unique factors should be considered when purchasing investment trusts for a portfolio, but fundamentals cannot be overlooked. Harvest Energy Trust (NYSE: HTE) has fundamentals and more. The stock is up more than 200% since bottoming in the first quarter, yet it still pays a handsome 6.21% dividend and trades with a 9.67 P/E ratio. P/B is 0.74 and P/S just 0.47.
The Wrap
John Dreman's value metrics are a good place for investors to start when considering a stock purchase. For others, they're an ample place to stop. That is, they're all that some value investors require to lay their money down. (Read more about other great investors like George Soros and David Dreman in our series on The Greatest Investors.)
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