Find Value Like John Neff

When the market slides like it has recently, I start to dig around for bargains.  One way I do this is by screening for stocks with the same criteria used by legendary investor John Neff, who made his mark running the Vanguard Windsor Fund for more than 30 years, beating the S&P by an average of 3.1% annually over that time. 

Neff did this by looking for companies with the following traits:

• Low price-to-earnings (P/E) ratios.
• Organic growth of 7% or more.
• The ability to maintain a dividend over time.

Using the Motley Fool CAPS screening tool, I’ve created a “John Neff Screen” that looks for stocks with the following criteria:

• P/E under 11.
• Three-year average revenue growth of 7%-plus.
• Dividend yield of 1%-plus.

I also use the CAPS community as a rough gauge of quality, and focus on stocks rated five stars, the best.

When I ran this screen back in May 2009, I whittled the findings down to seven stocks and added them to my own CAPS portfolio, where they’ve returned an average of 47% versus about 21% for the S&P 500. Results range from Harry Winston Diamond (NYSE: HWD), which has more than doubled, to tongue-twisting shipping company Dampskibsselskabet Torm A/S (Nasdaq: TRMD), which is down 26%.

In the name of full disclosure, I must tell you I also performed this exercise this January, with less impressive results. The companies I highlighted then average a loss of 4.1% versus a decline in the S&P of 1.6%.

Running Neff’s screen late last month returned 24 companies, including a number of stocks in the shipping and oil services businesses. I find the following worthy of further investigation:

Screening is only the first step. Investors have to perform due diligence to explain numbers like Paragon’s huge revenue growth rate. But these stocks are now on my radar, and I plan on digging further to hopefully uncover compelling values. 

Think Neff’s methods can identify value in today’s market?  Leave a comment below.