Watchlist Wednesday: Contrarian Approach

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Includes: CSCO, LRCX, MOS, VLO, WDC
by: Mitchell Mauer

In this edition of Watchlist Wednesday, we highlight five of the top stocks qualifying for the Contrarian Approach screen.

The screen is inspired by David Dreman's contrarian investment philosophy, which he describes in the book Contrarian Investment Strategies.

Description

Contrarian Approach is a simple screen, which finds solid companies trading at low price ratios. Dreman believes strongly in market overreactions and the principle of mean reversion.

His research and professional experience shows that a diversified list of financially strong, adequately sized companies, currently out-of-favor with the market, "provide superior returns over time."

Qualifying stocks for this screen all have a Current Ratio > 2 and Debt to Equity < 50%. The stocks are equally weighted by the following ratios:

  • Price to Book
  • Price to Earnings
  • Price to Free Cash Flow

Here is a breakdown of five stocks with the lowest combined rank as found on The Stock Market Blueprint:

  • Western Digital Corp. (NYSE:WDC) - Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. In addition, it provides consumer electronics solutions, including DVRs, gaming consoles, security surveillance systems, set top boxes, camcorders, multi-function printers, and entertainment and automobile navigation systems. Western Digital Corporation was founded in 1970 and is headquartered in Irvine, California.
    • Current Ratio: 2.76
    • Debt to Equity: 26.2%
    • Price to Book: 1.2
    • Price to Earnings: 10.1
    • Price to Free Cash Flow: 11.1
    • Combined Rank: 6
  • Valero Energy Corp. (NYSE:VLO) - Valero Energy Corporation operates as an independent petroleum refining and marketing company in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. It operates through two segments, Refining and Ethanol. The company also operates a 50-megawatt wind farm; convenience stores; filling stations, as well as truckstop, cardlock, and home heating oil facilities; and a credit card business. Valero Energy Corporation was founded in 1955 and is headquartered in San Antonio, Texas.
    • Current Ratio: 2.0
    • Debt to Equity: 36%
    • Price to Book: 1.6
    • Price to Earnings: 8.2
    • Price to Free Cash Flow: 11.4
    • Combined Rank: 9
  • The Mosaic Company (NYSE:MOS) - The Mosaic Company, through its subsidiaries, produces and markets concentrated phosphate and potash crop nutrients primarily for the agricultural industry worldwide. The company operates through three segments: Phosphates, Potash, and International Distribution. In addition, it provides nitrogen-based crop nutrients and animal feed ingredients, and other ancillary services; and purchases and sells phosphates, potash, and nitrogen products. The company sells its products to wholesale distributors, retail chains, cooperatives, independent retailers, and national accounts. The Mosaic Company was founded in 2004 and is headquartered in Plymouth, Minnesota.
    • Current Ratio: 2.0
    • Debt to Equity: 40%
    • Price to Book: 1.1
    • Price to Earnings: 10.7
    • Price to Free Cash Flow: 23.5
    • Combined Rank: 14
  • Cisco Systems, Inc. (NASDAQ:CSCO) - Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. The company serves businesses of various sizes, public institutions, governments, and communications service providers. Cisco Systems, Inc. sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California.
    • Current Ratio: 3.3
    • Debt to Equity: 40.0%
    • Price to Book: 2.4
    • Price to Earnings: 14.0
    • Price to Free Cash Flow: 14.3
    • Combined Rank: 18
  • Lam Research Corporation (NASDAQ:LRCX) - Lam Research Corporation designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits. The company offers its products in the United States, Europe, Taiwan, Korea, Japan, China, and Southeast Asia. Lam Research Corporation was founded in 1980 and is headquartered in Fremont, California.
    • Current Ratio: 3.0
    • Debt to Equity: 43%
    • Price to Book: 2.5
    • Price to Earnings: 16.5
    • Price to Free Cash Flow: 15.6
    • Combined Rank: 23

Implementation

Dreman recommends investing equally in a diversified group of stocks made up of 15 or more industries. This can be accomplished by periodically investing a consistent amount in the stock with the lowest combined rank.