We've come to the final installment of a three-article write-up regarding legendary investor John Neff, who spoke at the 2006 Financial Analysts Seminar, hosted by the CFA Institute. (If you missed them, check out parts 1 and 2.) Here's the best of the rest, including two stocks Neff currently finds interesting.
Current pick No. 1
One of Neff's current recommendations is YRC Worldwide
Net income and cash flow, good: EBITDA, bad
During the talk, an audience member asked Neff whether he also tracked free cash flow for a company. Neff stated that he does look at the relationship between net income and cash flow, but he places little faith in EBITDA, since he sees interest and taxes as clear cash outflows.
A curbstone opinion
Much like scuttlebutt investor Peter Lynch and fellow legend Philip Fisher, Neff also recommends talking to your family members and asking around the neighborhood for stores, services, and businesses your friends and colleagues find appealing. This manner of gathering insights could mean future juicy stock returns. As Neff explained, this approach can get you familiar with what you don't own, and if something becomes a good deal, you'll be educated enough to identify the opportunity and act on it.
Neff discussed certain events that benefit investors just for being in the right place at the right time -- what he calls "free plus." As an example, he mentioned the two to three buyouts per year in his portfolio; they indicated that other companies had found his holdings' low P/E multiples compelling bargains, or simply wanted a chance to take out a competitor at a cheap price.
A book with legs
Most great investors are serious bookworms, and Neff is no exception; he even gained notoriety for taking all of his weekly Wall Street Journals home for a second read during the weekend. He also reads as many investment publications as possible to further develop his "curbstone opinion." Once he owns a stock, he also reads as much as possible to keep tabs on it, from quarterly 10-Q filings to the annual 10-K.
Neff also reads Value Line religiously, keeping an eye on companies climbing the quality ladder and the newsletter's dozen or so investment yardsticks. He also likes to screen for stocks hitting new 52-week lows; currently, he said, that screen is identifying several good names.
"Wrong turn capital"
Regarding management compensation, it's hardly surprising that Neff finds hedge-fund compensation "way too greedy," because of its high cut of any upside and its ability to take "too much off the top." Neff estimated that had he charged hedge-fund life fees during his leadership of the Vanguard Windsor Fund
To illustrate his compensation at Windsor, he stated that he and his team shared perhaps 10 basis points in fees. That doesn't sound like much, but it was more than enough when Windsor became the market's largest mutual fund in the mid-1980s. Neff drew a laugh from the crowd by pointing out that he wouldn't need a charity dinner anytime soon.
Current pick No. 2
Another current stock recommendation is Lyondell Chemical
Finally, Neff has never been a fan of shorting a stock, since he finds the cards too stacked against investors. All gains from shorting result in short-term gains, taxed at much higher personal income tax rates. As such, he'd much rather take long-term gains and pay only 15% in taxes.
Overall, it was a real pleasure to have the chance to sit down with such a successful investor. At the Motley Fool, we're fortunate to have access to a great investing mind like John Neff's, and to share that knowledge with you. Moreover, it's refreshing to hear how a straightforward "good company, good industry, low P/E" approach to investing can be so lucrative, giving encouragement to value investor types like you and me.
Learn more about value investing, and discover more great stocks trading below their intrinsic value, with a free 30-day trial of Motley Fool Inside Value.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.