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The Contrarian Low-P/E Strategy buys unpopular stocks with low P/E and P/B ratios. It comes from the observation that these prices recover once excessive pessimism fades. It turns David Dreman's principles into rules.
Born in 1936 in Winnipeg, Canada. In 1977 he founded Dreman Value Management in the United States, which managed money in undervalued stocks for many years, and he wrote an investment column for Forbes for decades.
His first book, Contrarian Investment Strategy, came out in 1979 and was revised several times; the 2011 edition, Contrarian Investment Strategies: The Psychological Edge, is the latest. He is also known for work that used statistics to show investors' psychological mistakes, an early part of behavioral finance.
He relied on two facts. Analysts' earnings forecasts are often wrong, and by a lot. And when stocks are sorted by P/E, the cheapest 20% earned higher long-term returns than the most expensive 20%. So he chose to buy cheap stocks rather than predict earnings.
Popular stocks and neglected stocks react differently to news. A popular stock carrying high expectations rises a little on good news and falls hard on bad news. A neglected stock with no expectations barely moves on bad news and rises sharply on good news. Dreman saw buying neglected stocks as the better side of that difference.
P/E comes first, with P/B, price to cash flow (P/CF) and dividend yield checked as well. Pick stocks that are cheap on several measures together.
Check the debt ratio, current ratio and profitability. Many cheap stocks are cheap for a reason, and without this check you end up buying stocks that keep falling.
There is no telling which stock will be revalued, or when. Hold 20 to 30 across several industries and wait for some of them to rise.
When the P/E rises to around the market average, sell and pick again from the cheapest 20%.
This strategy model was independently built by Confluence Zone to quantify the investment philosophy in the works above. It is not an official model created, endorsed or reviewed by David Dreman or any related institution. Last reviewed: 2026-09-29
Related terms: PER · PBR · Dividend Yield
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