David Dreman
Contrarian Value
David Dreman built his contrarian strategy on behavioral finance: analysts systematically overreact, so the market's least-loved stocks — the bottom quintiles by P/E, price-to-cash-flow, price-to-book, and yield — are priced for a pessimism that usually proves excessive, while positive surprises move them disproportionately. But cheapness alone is a trap, so Dreman pairs the valuation screens with quality filters: real profitability, a sound balance sheet, and an earnings record strong enough to outlast the market's neglect. He wants large, financially sturdy companies temporarily marked down by sentiment, not businesses that deserve their price.
Methodology fidelity
Faithful adaptationSources reviewed 2026-08-24Dreman’s source method selects the cheapest market quintile by P/E, price-to-cash-flow, price-to-book, or yield, then applies financial-strength checks. The app’s 12x, 8x, 1.2x, and 3.5% valuation bars are fixed stand-ins for a cross-sectional quintile, and several quality cutoffs are implementation choices. The 15x normalized-earnings value and the bucket verdict are app proxies, not Dreman-published formulas.
Valuation Method
Contrarian Re-Rating Value
App modelThe margin of safety is the gap between the current out-of-favor price and what normalized earnings would be worth at a market-median multiple — the payoff if sentiment merely reverts to average.
Screening implementation (11 criteria)
| # | Criterion | Metric | Threshold | Data Source |
|---|---|---|---|---|
| 1 | Low P/E | Price / Diluted EPS | P/E < 12x (REITs: P/FFO < 12x) | Income Statement + Market Price |
| 2 | Low Price/Cash Flow | Price / Operating Cash Flow per Share | P/CF < 8x | Cash Flow Statement + Market Price |
| 3 | Low Price/Book | Price / Book Value per Share | P/B < 1.2x (banks: P/TBV < 1.2x; N/A for REITs) | Balance Sheet + Market Price |
| 4 | High Dividend Yield | Dividends Paid / Market Cap | Yield > 3.5% | Cash Flow Statement + Market Cap |
| 5 | Pre-Tax Profit Margin | Pre-Tax Income / Revenue | Margin ≥ 8% | Income Statement |
| 6 | Strong ROE | Net Income / Shareholders Equity | ROE > 12% | Income Statement + Balance Sheet |
| 7 | Adequate Current Ratio | Current Assets / Current Liabilities | Current Ratio > 1.5 (N/A for banks and insurers) | Balance Sheet |
| 8 | Low Debt/Equity | Total Debt / Shareholders Equity | D/E < 0.8 (N/A for banks) | Balance Sheet |
| 9 | Positive EPS Trend | Diluted EPS trajectory, up to 10 years | Latest EPS above the earliest year and positive (≥3 years of data) | Income Statement History |
| 10 | EPS Growth Rate | Diluted EPS CAGR, positive-EPS years | CAGR > 5% annualized (≥3 positive-EPS years) | Income Statement History |
| 11 | Adequate Market Cap | Market Capitalization | Market cap > $1B | Market Data |
Intrinsic Value Method
Contrarian Normalized Earnings
App modelIndustry-Median P/E (15x proxy) × 3-Year Average EPSValues the company as if the market re-rated it to an ordinary multiple: diluted EPS is normalized over the trailing three years to smooth a temporary earnings trough, then capitalized at a 15x proxy for the industry-median P/E. Refuses to produce a value when normalized EPS is negative or the EPS window crosses a share-basis break.
Verdict Logic
Two buckets. Valuation Screen (criteria 1-4): at least 2 of 4 must pass. Quality Filters (criteria 5-11): at least 5 of 7 must pass. Both buckets pass = BUY; quality alone = NEUTRAL; otherwise FAIL. Sector-gated criteria (bank/insurer/REIT) shrink a bucket rather than count against it.
What Would David Dreman Buy Today?
Sources
Contrarian Investment Strategies: The Psychological Edge
primary2012David Dreman
The definitive statement of the strategy: buy the cheapest quintiles by P/E, price-to-cash-flow, price-to-book, and yield, hold large financially-strong companies, and let analyst overreaction and surprise asymmetry do the work.
View source →Dreman Contrarian Value Fund Prospectus
primary2006Dreman Value Management / SEC
An SEC-filed description of the live strategy: below-average P/E, P/B, and price-to-cash-flow ratios and above-average dividend yields, with low P/E as the primary screen.
View source →