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8 Value Stocks Investors Are Buying

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Mark Roach, Dreman Value Management

Mark Roach, managing director and portfolio manager of Dreman's small- and mid-cap products, says his firm's investment philosophy steers it toward stocks that have fallen out of favor with most investors. The problem, he says, is that across his list of stocks that are cheap to the market historically, most have already had big moves.

Yet Roach has stayed focused on fundamentals and he urges investors to do the same. "Understand what you're buying and what you're paying for," he says. "Make sure they're not too over-levered. If rates move up, you don't want to have a lot of that leverage."

The Dreman Contrarian Small Cap Value Fund (DRSVX) has about $131 million in total assets spread across 107 holdings, with the most allocated towards financials and industrials. The Dreman Contrarian Mid Cap Value Fund (DRMVX) has about $1 million in assets and 68 holdings, weighted most towards financials and information technology.

The fund has held onto energy and materials names because of the big inflation push, but Roach says he has been selling more of its oil assets and moving towards natural gas plays, which he says offer good opportunities at better valuations.

One name on his list is Ultra Petroleum (UPL), a Houston-based independent oil and gas company with operations primarily in Wyoming and Pennsylvania. Shares are down 6% over the past 12 months and have recovered only 44% since the March 2009 low.

"This is a mid-cap stock that has gone nowhere since the end of 2009," Roach says. "This has been a stock that has tremendous ability with 96% of assets which are natural gas, but a lot of analysts are shunning natural gas plays. Long term, it has good assets with long reserve life and it is cheap across all metrics. They generate a good amount of cash flow. But it has no oil exposure, which has put it in the penalty box."

In the technology space, Roach likes Lexmark International (LXK - Get Report), the Lexington, Ky.-based staple technology company that manufactures and supplies printers, ink and other solutions for offices and home. Over the past year, Lexmark shares are essentially flat.

"This is an all-but-forgotten tech name and it's been a favorite for people to bash on," Roach notes. "It's certainly not the flash semiconductor or high flying cloud computing name. But from a valuation perspective, this is a name we think can offer some decent returns going forward. It's not trading at a premium to itself. It's one of the cheapest in its group and it offers a good brand name."
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