Who is David Dreman, and what is the Dreman Screen?
David Dreman built his career betting against the crowd. As chairman of Dreman Value Management and the author of a long-running Forbes column, he turned one observation into a discipline: investors routinely overpay for popular stocks and punish unpopular ones far too harshly. The Dreman Screen is that idea made mechanical — it looks for large, financially sound companies stranded in the cheapest part of the market, the stocks most other investors have already given up on. Dreman started writing about market psychology in the early 1970s and laid out the approach across several books, from "Contrarian Investment Strategy: The Psychology of Stock Market Success" (1979) to "Contrarian Investment Strategies: The Next Generation" (1998).
The contrarian idea
Dreman's premise is that markets run on emotion, not the cool rationality that academic models assume. Crowds push glamour stocks above what their earnings can justify and dump troubled companies well past fair value — misjudgments that tend to reverse, often within a year. He identified the abandoned names with a short list of value markers: a low price-earnings ratio, a low price-to-book or price-to-cash-flow ratio, or a high dividend yield. Dreman kept the math deliberately plain, distrusting dividend-discount models and their false precision, and ranked the market on a simple price-earnings ratio, beginning his search in the cheapest 40%. The yield requirement does double work: it pays you to wait, and it cushions the fall if the price keeps sliding.
Cheapness by itself is not the thesis. Dreman favored large and mid-sized companies because they carry the balance-sheet depth to survive a rough stretch, the visibility to get re-rated quickly once results improve, and less room for the accounting tricks that sink smaller firms. Pairing the low multiple with real earnings growth and a solid financial position is what keeps the screen buying recoverable bargains rather than businesses that are cheap for good reason.
What the Dreman Screen looks for
- Market capitalization in the top 30% of the database (a percentile rank of 70 or higher), keeping the screen in large- and mid-cap territory.
- A price-earnings ratio in the cheapest 40% of the database (a percentile rank of 40 or lower).
- Total liabilities to total assets below the median for the company's sector — a financial-strength test scaled to each industry's norms.
- A dividend yield of at least 1.5%.
- Earnings-per-share growth from continuing operations over the trailing 12 months at or above the database median.
- Earnings-per-share growth from continuing operations for the latest fiscal year at or above the database median.
- An estimated EPS for the current fiscal year above the actual EPS reported for the last completed year.
- An estimated EPS for the next fiscal year above the estimate for the current year — forward growth expected in each of the next two years.
- Over-the-counter (OTC) stocks excluded.
Why the Dreman Screen can work
The mechanism is the reversal itself: an overreaction that corrects as the market rediscovers a company it had written off, lifting both the earnings and the multiple investors will pay for them. Beaten-down large caps are well placed for that rebound — they stay in the public eye, so improving results get noticed and re-rated fast. Dreman's own research on earnings surprises pointed the same way. He found that low price-earnings stocks reacted more strongly to positive surprises than expensive ones did, and fell less when the surprise was negative. When little is expected of a company, good news genuinely changes the story; when a stock is priced for perfection, a beat only confirms what the price already assumes.
What to keep in mind
Contrarian value asks for patience, and this screen offers no sign that the turn has begun — you are buying cheapness and waiting for the crowd to come around, which can take longer than you expect. Some of these stocks are cheap because the business is genuinely deteriorating, the classic value trap, and the filter cannot tell one from the other. Read the story behind each name, check that the dividend is covered by earnings rather than borrowed, and spread the risk. Dreman himself recommended roughly 15 to 20 stocks across 10 to 12 industries, precisely because the returns from any single contrarian pick vary so widely.
Sources
Contrarian Investment Strategies: The Next Generation, David Dreman, Simon & Schuster, 1998; and Contrarian Investment Strategy: The Psychology of Stock Market Success, David Dreman, Random House, 1979.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition.