David Dreman (Trades, Portfolio) founded Dreman Value Management in 1977, a contrarian value investing firm. During the third quarter, Dreman purchased 62 new stocks and added to the fund’s position in 42 more. He also divested 79 stocks and reduced the position in 36 holdings.
Dreman, a pioneer in behavioral finance, is the author of five books, the most recent of which is Contrarian Investment Strategies: The Psychological Edge. In addition, he has been a senior columnist at Forbes for more than 30 years, where his column is called The Contrarian.
His investment philosophy is that the best way to identify undervalued and out-of-favor stocks is through a low P/E approach. The firm’s website points out that, while the approach has a successful record, it is rarely followed by investment managers. The reason boils down to behavioral finance and that there are many forces that dissuade managers from following proven strategies.
In an interview with Steve Forbes in 2012, Dreman described his investing philosophy in more detail. The firm diversifies and doesn’t make big bets on any one stock. The size of each purchase is usually similar; if a position is bought, the firm will sell another.
New buys
Dreman purchased 62 new stocks during the third quarter; the largest impact to the portfolio was 270,567 shares in Rayonier Advanced Materials (RYAM, Financial) at an average price of $35.07 per share.
Rayonier Advanced Materials is the leading global supplier of specialty cellulose products, which is used to make a variety of products, including cigarette filters, pharmaceuticals and paint. It spun off from its parent company Rayonier (RYN, Financial) in June.
Specialty cellulose is a refinement of the wood pulping process and is a highly concentrated industry with significant barriers to entry. According to Barron’s, only three companies control 70% of the global specialty cellulose industry.
The company’s plants in Florida and Georgia can produce up to 675,000 metric tons of cellulose. RYAM’s website states the intellectual property and manufacturing process has been developed over the course of 85 years.
Seven other gurus also purchased the stock during the quarter, including Prem Watsa (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), and Joel Greenblatt (Trades, Portfolio).
The next three new holdings in terms of portfolio impact are Blue Hills Bancorp (BHBK, Financial), KB Home (KBH, Financial) and Micron Technologies (MU, Financial).
Sold out
Dreman sold out of 199,220 shares in ITT Corp (ITT, Financial) at an average price of $47.56 per share. The fund had held shares since the fourth quarter of 2011.
ITT is a manufacturer of highly engineered critical components and technology solutions for the energy, transportation and industrial markets. Its four business segments produce products such as industrial pumps and valves, as well as shock absorbers and brake pads for the automotive and rail markets.
When comparing the stock price to the Peter Lynch earnings line, it seems the stock recently became overvalued.
ITT’s revenue and free cash flow growth has been negative over the past 10 years, at -15.9% and -14%, respectively.
The next three divestures that has the largest impact to the portfolio are Steel Dynamics (STLD, Financial), City National Corp (CYN, Financial) and Gentiva Health Services (GTIV, Financial).
