A diversified group of low P/E stocks has usually outperformed both a diversified group of high P/E stocks and the market as a whole. Therefore, they must either exclude some of the best stocks or include too many of the worst stocks. Dreman's contrarian investing strategies are derived from three measures: price to earnings, price to cash flow, and price to book value. When inverted, the price to earnings ratio becomes the earnings yield.
Within each book, he hints at various workable approaches both in stocks and bonds; however, he is most explicit in his best known work, "The Intelligent Investor". In my experience, most screens result in less than one buy order per three hundred stocks returned, and I usually read more like fifty to a hundred annual reports per buy order at a minimum. Buyout firms, unconventional money managers, and vulture investors now check such excessive bouts of public pessimism by taking large or controlling stakes in troubled companies.
Many investment writers have proposed at least one such formulaic approach during their lifetime. However, it is an immaterial factor. Humans tend to have little difficulty describing the variables – that is, creating the checklist. So, there are real advantages to favoring a formulaic approach to investing if such an approach would yield returns similar to the returns a complete stock by stock analysis would yield. It is wise to place great weight upon each of these measures; however, it is foolish to disqualify any stock because of a single criterion (which is exactly what such a screen does).
This fact suggests that water pumps Suppliers have a very hard time quantifying the future prospects of most public companies. The other two contrarian methods: the low price to cash flow approach and the low price to book value approach work for the same reasons. Of these measures, the price to earnings ratio is by far the most conspicuous.