You don't make money buying hot stocks that are in the news--but by investing long term in sound companies that are out of favor, says value investor David Dreman. "The most exciting stocks are almost always overpriced," he says.
Dreman manages $6 billion, $4 billion of which is in the Kemper-Dreman High Return Equity Fund. While the fund has earned 31% annually for the past three years, beating the Standard & Poor's 500-stock index, Morningstar notes that it takes average risks. The fund is up 5% through Jun. 12. Dreman likes battered tobacco stocks, including Philip Morris, which fell nearly 5% June 10, after a Florida jury ruled against Brown & Williamson Tobacco in a case involving a smoker's death. Philip Morris sells for $37, but Dreman says its assets, excluding tobacco, are worth $50 to $60 a share. While "everybody thinks the outlook is terrible" for oil, he owns Amoco, Atlantic Richfield, Texaco, and some oil-service companies. Many banks boast rich dividends--a reason some financial stocks are "still pretty cheap." Freddie Mac, Fannie Mae, PNC Bank, and Fleet Financial Group are a few of his favorites.