The Citigroup Economic Surprise Index, which measures how current economic data is comparing to expectations, is on the rise along with investor confidence regarding the expanding economy, writes Validea CEO John Reese in a recent article for Forbes.
Historically, however, markets perform best not during times of economic expansion, but rather when the economy is improving despite lower expectations, writes Reese. When things are going relatively well, he argues, “forecasters tend to extrapolate forward using recent trends and assume the good news will continue.”
Reese outlines the contrarian investment approach of guru David Dreman, who argues that investors can beat the market by resisting the herd mentality and focusing on fundamentally sound companies priced in the bottom 20% of the market with respect to such metrics as price-earnings, price-cash flow, price-book and price-dividend ratios.
Using his Dreman-inspired stock screening model, Reese identified the following five high scoring stocks:
- Baxter International (BAX) provides renal and hospital products and is favored for its price-earnings and price-cash flow ratios as well as its liquidity and leverage.
- Annaly Investment Management (NLY) is a real estate investment trust with a revenue base and dividend yield that both earn high marks, as well as favorable price-earnings and price-book ratios.
- Vale SA (ADR) (VALE), a metals and mining company, boasts an exceptional pre-tax profit margin as well as favorable price-earnings and price-cash flow ratios.
- Chimera Investment (CIM) is a real estate investment trust with favorable annual earnings growth over the past five years as well as consistent earnings-per-share.
- Amtrust Financial Services (AFSI) is an insurance holding company that provides (through its subsidiaries) specialty property and casualty insurance. Ten-year average return-on-equity and return-on-assets both earn high marks, and management’s use of retained earnings adds appeal.