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Embrace Your Inner Contrarian

Use this screen to scoop up good businesses that the market fears. In a few years, your clients may thank you.

Justin Fuller, 06/16/2008

When you look back at history, investors who have been willing to lean into the wind during times of distress usually have been the ones who have produced superior returns over the long term. Berkshire Hathaway BRK.B chairman Warren Buffett--perhaps the most successful investor of our time--put it best in his 2006 letter to shareholders when he said that he tries to "be fearful when others are greedy, and be greedy when others are fearful."

This screen aims to uncover a few stocks that the market dislikes but that we believe over the long term will create wealth for owners. The screen was performed on Feb. 19 in Morningstar Principia, but an equivalent screen can be created in Morningstar Advisor Workstation Office Edition.

First, we want a set of companies that are unloved by the market and whose share price has declined over the past year. To find these, we ran a search for all companies whose share price had a negative one-year total return.

Total Return 1 Year < 0.00

Second, we want to eliminate companies that fall into the micro-cap space. Micro-caps can be tricky investments to judge and may not be appropriate for most investors. Thus, I want to include only companies that have a market cap of more than $100 million.

And Market Cap > 100.00.

Third, we want to look for businesses with good financial returns over the past year. Return on equity is my favorite measure of profitability, as it encompasses a business' complete financial performance. For this screen, we'll use a relatively high 15% ROE or greater.

And ROE % Year 1 > = 15.00%

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