Walker & Dunlop: A Dreman-Style Contrarian Buy

07/28/2017 2:52 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese, editor of Validea, maintains a "Hot List" portfolio that includes stocks that meet the investing criteria of some of the market's most legendary investors.

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Walker & Dunlop (WD) provides commercial real estate financial products and services primarily to developers and owners of multifamily properties. The company earns a 100% ranking based on the contrarian investor strategy of David Dreman.

A company should show a rising trend in the reported earnings for the most recent quarters. WD's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.13, 1.35 have been increasing, and therefore the company passes this test.

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. WD passes this test as its EPS growth rate over the past 6 months (40.62%) has beaten that of the S&P (1.61%).

WD's estimated EPS growth for the current year is (22.47%), which indicates the company is expected to experience positive earnings growth. As a result, WD passes this test.

This methodology would utilize four separate criteria to determine if WD is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".

The P/E of a company should be in the bottom 20% of the overall market. WD's P/E of 11.58, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.36), and therefore passes this test.

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one-third of ROE from among the top 1500 large cap stocks, which is 17.03%. The ROE for WD of 24.74% is high enough to pass this criterion.

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. WD's pre-tax profit margin is 34.04%, thus passing this criterion.

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