n528  0207  28 Feb 83
BC-CONTRARY-02-28
    By Andrew Leckey
    (c) 1983 Chicago Sun-Times (Field News Service)
    Call them sleepers.
     Neither shining stars nor basket cases, they're the sort of
investments only free thinkers with a really contrary mindset would
bother to spend time and money on.
     To the rumbling financial herd, such choices appear ''out of it,''
or even boring. But who ever made money by following what everyone
else thought, anyway?
     ''I've been the house contrarian here for 15 years, trying to
capitalize on the investment prejudice of the majority,'' declares
Leo H. Dworsky, manager of Contrafund, a mutual fund of Boston's
Fidelity Brokerage Services that has posted consistent gains by
investing in the stock of unnoticed and unloved companies. ''I enjoy
working the gap between reality and what others perceive as reality.''
    In the same vein, junk bond funds are ''simply fascinating and truly
contrarian,'' according to David Dreman, managing director of New
York's Dreman, Gray & Embry investment management firm and author of
''The New Contrarian Investment Strategy'' (Random House, 1983). Such
funds specialize in bonds rated BB or lower, those usually considered
untouchables.
     Surprisingly, the average yield of these bonds since the turn of
the century has outstripped AAA bonds by more than 50 percent and the
bankruptcy rate of this group has been less than 1 percent. The fact
that large insurance companies that hold considerable quantities of
bonds are required to sell when ratings become too low helps drive
down their price.
    ''Analysts at brokerage firms clearly overreact and the rest of us
can advantage of their miscalculations,'' said Dremen. ''And as
institutions gain more power in the market, they become more
predictible and near-term in their thinking. We think more
long-term.''
    Contrarians labor at finding nuggets among the unfashionable, but
any one definition of their philosophy is hard to come by. For they
don't even agree with each other: In the stock market, Dremen will
only choose issues with low priceearnings ratios of about five or
six. But Dworsky has included some out-of-favor stocks with PEs as
lofty as 18. (The Standard & Poor's 500 average is 11).
     Right now, Dreman wouldn't touch high-priced technology stocks or
health company stocks, those darlings of Wall Street, with a 10-foot
pole. ''I'm not interested in either big cheap dogs (or) high fliers,
but in stocks with underlying financial strength that have continued
to pay high and increasing dividends even though depressed,'' he
explained, adding that his firm's portfolio was up 28 percent last
year.
     This currently means propertycasualty companies such as Aetna Life
& Casualty and Travelers Corp. (''We're talking 15-20 percent growth
for 10 years, with rates keeping up with inflation at the same
time.''), food firms such as Kroger Co. and General Foods,
communications firms such as American Broadcasting and oil stocks
such as Standard Oil (Ohio) and Atlantic Richfield. His junk bond
fund suggestions are American Investors Income of Grenwich, Conn.,
and Fidelity High Income Fund of Boston.
     ''I also want stocks I pick to be considered cheap based on current
reality, not someone's unsubstantiated forecast of the future,''
Dreman said.
     In choosing stocks using a contrarian philosophy, Dremen suggests
looking for (1) a strong financial position, (2) as many favorable
operating and financial ratios as possible, (3) a higher rate of
earnings growth than the S&P 500 both in the immediate past and
projected into the future, (4) earnings projections based on
conservative estimates, and (5) a high dividend yield.
     Although the Contrafund managed by Dworsky has been up six years in
a row, last year wasn't a stellar performance. It was up 17 percent,
but the market as a whole was up 21 percent.
    ''Our problem was that last year was one in which investors bought
high and sold higher, rather than buying lower and selling higher as
in previous years,'' Dworsky said. ''When people buy strong stocks
and they get even stronger, this doesn't leave much room for
contrarian philosophy of buying on weakness.''
     At the end of last year, the biggest holding in the 23-stock
Contrafund was Campbell Soup. It posted a 75 percent jump during the
year and is ''a marvelous company and a better growth company than
IBM because its finances are stronger.'' Burlington Northern was
another out-of-favor choice that has done well.
     ''International Minerals & Chemical is on the list, since people
are prejudiced against it, thinking that the farmer is doing bad,''
Dworsky explained. ''International Paper has also done well for us.''
Contrafund has been in and out of oil stocks several times in the
last few years, ''making money in four out of five transactions,'' he
added proudly.
    However, the still-beleagured automobile industry ''would be lucky
if it could get back to its level of 1958,'' said Dremen. He wants no
part of such limited horizons and scoffs at auto stock buy
recommendations given by analysts these days.
    A contrarian, it must be remembered, loses interest in outcasts once
the herd thinks they're no longer outcasts.
    END
    
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