David Dreman (Trades, Portfolio), a leading contrarian investor and pioneer in behavioral finance, founded Dreman Value Management in 1997.
Dreman’s previous research has proven that the stock that are out of favor as indicated by their P/E ratio performed significantly better than those considered to have better outlooks. He has written five books on the subject, the most recent of which was Contrarian Investment Strategies: The Psychological Edge. Dreman has also been a columnist for Forbes for more than 30 years.
GuruFocus will have a Q&A with Dreman in the next few weeks and invites readers to submit their questions here. Please submit questions about his investing philosophy or specific stocks by the end of the week.
During the fourth quarter, Dreman added 58 new stocks to his portfolio, with a quarter-over-quarter turnover of 9%. The following are the five largest new buys in terms of impact on the portfolio.
Old National Bancorp (ONB, Financial)
Dreman purchased 608,592 shares of Old National Bancorp, which traded for an average price of $14.04 during the quarter. The company has a 0.74% portfolio weighting.
Old National Bancorp is a financial holding company that provides loan and depository services, investment and brokerage services and lease financing through its banking subsidiary.
The stock has been up 5% over the past year and is close to fair valuation when compared to the Peter Lynch earnings line.
Preliminary data for FY 2014 estimates EBIT per share will be $1.40, just a penny less than the previous year’s $1.41.
The stock currently trades at $14.16 with a P/E ratio of 15 and P/S ratio of 2.9.
Triumph Group (TGI, Financial)
Dreman also purchased 107,356 shares of Triumph Group for an average price of $65.78 per share. Triumph now has a 0.59% portfolio weighting.
Triumph designs, manufactures, and repairs aerostructures, aircraft components, accessories, subassemblies and systems. It serves original equipment manufacturers of commercial and business aircraft, as well as commercial airlines and air cargo carriers.
GuruFocus rates the company’s business predictability as a perfect 5 stars. The DCF model, which relies on consistent earnings, projects a fair value $107.89, giving a 44% margin of safety. The stock currently trades at $60.33.
EBIT per share for FY 2014 was $7.58, which declined from $10.13 the year before.
The current P/E ratio is 15.9, while the P/S ratio is 0.8.
Dreman added 139,669 shares of Owens-Corning to the portfolio, which traded for an average price of $33.30 during the quarter.
The company produces glass fiber reinforcements for composite systems, as well as other residential and commercial building materials.
The stock has been down 8% over the past year and is slightly overvalued according to the Peter Lynch chart.
EBIT per share in FY 2014 was $3.31. The following chart shows the earnings trend over the years.
The stock currently trades at $40.98 with a P/E ratio of 21.4 and P/S ratio of 0.9.
Rolls-Royce Holdings (RYCEY, Financial)
Dreman also bought 70,776 shares of Rolls-Royce Holdings for an average price of $68.61. The stock now has a 0.39% portfolio weighting.
Rolls-Royce Holdings manufactures aerospace, marine and industrial gas turbines for civil and military aircraft. Its five business segments are civil aerospace, defense aerospace, marine, energy and power system.
Preliminary data estimates EBIT per share will be $5.75 for FY 2014, down from $6.66 the year before.
The current dividend yield is 2.46%, which is close to the 10-year high. The payout ratio is a low 18%, indicating the dividend yield has room for growth.
The stock currently trades at $72.15 with a P/E ratio of 13 and P/S ratio of 1.1.
SpartanNash Company (SPTN, Financial)
The fifth-largest purchase was 150,079 shares of SpartanNash, which traded for an average price of $23.10 during the quarter. The company has a 0.32% portfolio weighting.
SpartanNash is the largest food distributor serving military commissaries and exchanges in the U.S. in terms of revenue. It also operates 165 retail stores with brands including Bag N’ Save, Family Fresh Market and Sun Mart.
The stock has been up 22% over the past year and is overvalued according to the Peter Lynch chart.
EBIT per share in FY 2013 was $2.86, which has largely remained stable since 2007. Over the past five years, earnings have declined by 1.6%.
The operating margin in 2013 was 2.34%, which is below the defensive retail industry average of 2.9%.
The stock currently trades at $26.75 with a P/E ratio of 36.4 and P/S ratio of 0.2.
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