Invest Like John Neff

To improve my skills as an investor, I try to learn as much as I can about investing legends, such as John Neff, who ran the Vanguard Windsor Fund for more than 30 years, beating the S&P by an average of 3.1 percentage points annually over that time. Neff was a value investor who looked for companies with the following traits:

• Low P/E ratios
• Organic growth of 7% or more
• The ability to maintain a dividend over time

To help me find companies like those Neff might invest in, I turned to the Motley Fool CAPS Community. Using the CAPS screening tool, I tried to replicate a John Neff screen, looking for stocks with the following criteria:

• P/E ratio under 11
• Dividend yield of 1% or better
• Three-year average revenue growth of 7% or better

Of course, screening for stocks with these traits was only the first step: Neff also required a strong fundamental case before he would even consider a stock. For the sake of simplicity, I let the CAPS community do this work for me, and searched only for stocks with a four- or five-star rating.

When I ran this screen back in May 2009, a large number of companies showed up, and I whittled those down to seven stocks and added them to my own CAPS portfolio. Since then, they've returned an average of 45% vs. about 25% for the S&P 500. Results ranged from Harry Winston Diamond, which has doubled since May, to Brazilian airplane producer Embraer (NYSE:ERJ), which is up 17%.

Of course, good value is harder to find these days than it was last May. A screen in mid-January 2010 returned 25 companies, including the following:

Note that these aren't stock recommendations, but rather the first step in the research process. My plan is to track these selections, learning about them in the process. Do you think John Neff's methods can uncover value in today's market? Head over to CAPS and share your thoughts with 145,000 other members.