Have you ever wondered what separates David Dreman, Warren Buffett, Charlie Munger, etc. from the rest of the world? The answer is simple, but the force behind it can make the difference between a great investor and an average investor. I am talking about investor psychology, also known as Behavior Finance.

One can learn value investing by picking up a couple of books, attending a couple of seminars, etc. but all that is useless if you let emotions interfere with your decision making process. In the preface to the 4th edition of Benjamin Graham’s The Intelligent Investor, Warren Buffett had this to say about successful investing:

It is amazing what a volatile market can do. As I experience my first market correction of my short investing career, everything that I have read has prepared me in finding the bargains. The big financials are the obvious choices but finding a small well-run company is where the big money is made. I could sit here and write several articles on big banks but that is not why I set up this blog for in the first place. I wanted to find small caps that would outperform the market in the long run. Lately, I have hit the books and came out with a big catch. United Rentals (URI) is the name and value is the game.

Business Profile from Yahoo Finance

It has been a while since I have done security analysis on a stock with a market cap of this size. Currently, Mr. Market is valuing Vineyard National Bancorp (VNBC) at less than $100 million. The million dollar question is whether Vineyard warrants this type of valuation. As Buffett has said, “Price is what you pay, Value is what you get.”

The Business

The following five companies appeared using a minimum market capitalization of 256 million returning 100 stocks. All five companies have pretax earnings yield of at least 10% and high pretax return on capital.

Financials

Bank of America (BAC) has never been one of my favorite banks, but with fundamentals like these, it became hard to keep off the list.

The debate that is going on in my mind is whether Murdoch is overpaying for Dow Jones. The first thought that came to mind when I heard the offer on television was a) Murdoch is paying too high of a premium b) investment return on Dow Jones’s newspaper assets (Wall Street Journal and Barron's) are sure to decline as time passes.

Since the first posting, Amgen has agreed to acquire two privately held bio-tech companies using cash. On the 4th of June, Amgen agreed to buy Santa Clara based Ilypsa for $420 million in cash. The acquisition adds Ilypsa’s main product, Ily101, which is designed to treat hyperphosphatemia in chronic kidney disease in patients on hemodialysis to Amgen’s already strong pipeline.

The clinical studies and new warning labels are sure to impact Amgen’s top and bottom line. The question is how much impact? Analysts and sometimes the panel seemed confused about the whole situation. According to Forbes.com, the panel asked several times “what was the question?” and the questions themselves were “vague.” The shares of Amgen have now become very attractive despite the recent selloff.

Amgen Inc., a biotechnology company, engages in the discovery, development, manufacture, and marketing of human therapeutics based on advances in cellular and molecular biology. It markets human therapeutic products in the areas of supportive cancer care, nephrology, inflammation, and oncology worldwide.

When evaluating a biotech company, one has to pay special attention to Research and Development (R&D) and its pipeline. According to its recent annual report, Amgen spent 3.36 billion on R&D, compared to 2.314 billion the prior year. The bears will argue that Amgen's pipeline is dry. But that argument is as old as the hills. Amgen's pipeline is one of the strongest, if not the strongest in the industry. Using three years of clinical data, Amgen plans to file for FDA approval in 2008 for denosumab in osteoporosis (Phase III).Denosumab will be the premier osteoporosis drug in the market once it is approved. Amgen is also on track to file for AMG 531 (Phase III), the treatment of immune thrombocytopenic purpura (a rare bleeding disorder). The filing is set for this year.In addition, A Phase III trial to prolong survival in prostate cancer patients whose cancer has spread to the bones during treatment is also ongoing.

Lazard Capital analyst, Joel Sendek lowered 2007's EPS estimates from 4.30 to 4.09. Using the same 21 cent decrease for 2008, we arrive at EPS of 4.48 (4.69-.21). Multiplying the new EPS (4.48) by a conservative P/E of 19 we arrive at a price of $85.12.Why the P/E of 19? Amgen's current ttm P/E is 22. For the past 10 years, the P/E for Amgen has been as high as 60 and as low as 23. In conclusion, Amgen is still a bargain despite the recent events.

Well, it didn’t take me long to find something interesting.

The homebuilders companies are still suffering loses with CEOs seeing no end in sight. On the other hand, the stocks have kept going up despite companies' reporting. Two things might be causing this. First, the market is up substantially without any big dips and is simply carrying the homebuilders with them. Second, institutions are feeling the end is near and the housing sector might be headed for good times.

In my opinion, this is what makes Wall Street unique. Can you imagine every single investor buying low p/e stocks? There wouldn’t be any low p/e stocks around!

Being a Contrarian Investor is going against the crowd and usually means going against what’s popular. But, what happens when the unpopular becomes popular? Let’s just say it is a good feeling.

After I wrote the article on Conoco Phillips, I looked around if anything interesting could be going on in other oil sectors and I was not disappointed. The company that I found and like is BJ Services (BJS). Here’s the company profile from Yahoo Finance:

BJ Services Company provides pressure pumping and other oilfield services for the petroleum industry worldwide. Its pressure pumping services consist of cementing and stimulation services used in the completion of new oil and natural gas wells, and in remedial work on existing wells both onshore and offshore. The cementing services comprise blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped into a well between the casing and the wellbore; and stimulation services include fracturing, acidizing, sand control, nitrogen services, coiled tubing, and service tools. The company also offers other oilfield services, including completion tools, completion fluids, casing and tubular services, and production chemical services, as well as precommissioning, maintenance, and turnaround services in the pipeline and process business, including pipeline inspection. Its customers include major and independent oil and natural gas producing companies, as well as national oil companies. BJ Services was founded in 1872 and is based in Houston, Texas.

Here’s the company profile from Yahoo Finance:

First lets check out Home Depot’s numbers since Nardelli took over in 2000. Revenues have nearly doubled from 45 billion to 81 billion. Earnings have more than doubled from 1.00/share to 2.72/share. Return on equity has held steady at 18-22%. Return on assets have also stayed steady in the 12-15 percentiles. Gross margins have also increased steadily from 29.7% to 33.4%. Everything looks fine, so “what’s up doc?”

The answer is quite simple; investors bought high. The P/E for Home Depot in 2000 is a startling 56. Investors quite frankly bought on the fools theory. The fools’ theory tells us to buy high and sell to a “fool” higher. In this case the fool never bought higher.

It struck me right away that she was not up to date with what was going on at Sears Holdings (SHLD). She had the picture of a struggling American icon. I had the vision of a baby Berkshire Hathaway (BRK.A).

Sears Holdings was created when Kmart Holding Corp. acquired Sears Roebuck, thus creating Sears Holdings Corp. Both Kmart and Sears have been around since the late 19th century and both struggled in the latter half of the 20th century as Wal-Mart (WMT) expanded.

The Company is a short-to-medium haul truckload carrier based in Iowa. The company provides nationwide transportation service to major shippers. and it mainly operates east of the Rocky Mountains, hence the name Heartland. Its average distance for shipments is 523 miles. Think of Heartland as the Southwest Airlines (LUV) of the trucking industry before Southwest went nationwide.

The company’s president is Russell Gerdin. He has held that post since 1978 and chairman of the board since 1986. In an era when CEO’s are being fired at a rapid pace Heartland has shown stability. Russell’s compensation is at a modest 300K.