“observers call me a contrarian, a rather vague label that suggests a stubborn nature. Personally, I prefer a different label: low price-earnings investor.”
John Neff can be mapped as a contrarian, value-driven investor who relied on low P/E ratios, strong fundamentals, and long-term compounding, while avoiding glamour stocks and emphasizing dividends. His style was disciplined, conservative, and focused on finding “unloved” companies with real earnings power.
Question 2:
From Caddying, paper delivery, soda fountain work, Neff learned the value of hard work and small, steady earnings rather than chasing glamour.
This struck me : “Working for my father at least taught me that you don’t need glamour to make a buck. Indeed, if you can find a dull business that makes money, it is less likely to attract competition. Also, merchandise well bought was merchandise well sold. “
Question 3:
“Ford, our largest holding at one time, which had increased its dividend by al- most 60 percent in just 6 months.”
Ford Motor Company as a clear example of his style. At the time, most investors avoided Ford because they worried about ups and downs in the car business, labor problems, and competition from overseas. Neff, however, noticed that Ford still had strong cash flow, paid good dividends, and had solid earnings that others were overlooking. He bought the stock when its P/E ratio was much lower than the market average, which gave him both safety and value. When the auto industry recovered, Ford’s strong business showed through, and the stock gave big returns to the Windsor Fund. Neff used this case to prove that even in industries with cycles, buying simple but profitable companies at the right price can lead to excellent long term results.
I also like buying an industrial name like “Borg Warner and the principal reason it was selling for 4.4 times 1979 earnings”
Question 4:
John Neff’s investment in Kmart turned out to be one of his least successful cases. He bought the stock because it looked cheap and fit his contrarian style, but probably he underestimated how quickly the biggies like Walmart and Target were taking over the retail market. stayed “cheap for a reason,” showing that even low P/E stocks can be value traps if the business itself is weak.
Question 5:
NSE: Ganesh Benzoplast John Neff liked companies that looked “dull but profitable,” with steady earnings and undervalued prices. Ganesh Benzoplast fits that idea because it runs a storage and logistics business for oil and chemicals—an industry that is not glamorous but has steady demand. Its valuation is still low compared to bigger logistics players. (Current PE:7)
NSE : Sigachi Industries Sigachi makes cellulose-based products used in pharmaceuticals and food , Neff liked companies with moderate and Sigachi has shown consistent expansion in demand for its products. The stock trades at reasonable valuations compared to high-growth pharma names, and its business model is simple and cash-generating. This kind of moderate growth, low valuation, and essential product line . (Current PE 14)
Question 6:
Search the Indian equity market (NSE + BSE listed companies, including midcaps and select smallcaps) for John Neff–style opportunities: single-digit P/E ratios, dividend yield ≥ 2%, earnings growth rates ≥ 7% annually, and double-digit historical earnings growth over the past 5–10 years. Focus on companies that are cash generative, not obviously impaired, and show evidence of capital discipline (progressive dividends, buybacks, or consistent special dividends). Include recently out-of-favor names (price down vs. 1–3 years), but verify that fundamentals remain intact via annual reports, investor presentations, or exchange filings
Neff’s sell strategy is different than Fisher. Neff buys wares to sell and “harvests” when the market has strong demand and the price is fair or higher. Neff is okay buying the same stock later on down the road and doing the same thing all over again. Fisher buys forever and counts on compounding for many years; he cautioned against buying and reentering later. Assuming there is not a “right way” to do it, why should an investor choose one method vs another? It appears that all work.
Neff tended to buy more mature businesses. Think of the equation: Change in stock price = change in business value + stock price going to business value + (noise). Fisher chose companies with a much larger first component whereas Neff focused more on the second component of the equation. Holding on for a long time usually requires *unexpected* value to continue to be created. Usually that is a result of attractive reinvestment economics.
I think that it comes down to discipline. A disciple is a follower of a way. As an investor you need to stick to your process. If you don’t you are constantly at risk of greed or fear overcoming your judgement. Neff sold when the price met his target as a defence against greed. Fisher looked always at the fundamentals and ignored the price, again as a way of avoiding being frightened out of a position prematurely by a plunge or a surge. Some use stop losses, to take the decision away from your inevitable biases, others use charts as a signal. Whatever process you decide to use you need to understand your own psychology and find your own way to deal with it. Then stick with it when one or both the two emotions are beating in your heart louder than a drum.
Neff has one of the simplest investment styles we have studied, with an iron discipline. Buy when PE is cheap, sell when reasonably priced. Gradually move the money to new bets as the price target is reached.
Question 2: What about Neff’s background and circumstances made his approach the right one for him?
He was brought up tough and self reliant and was always a contrarian. In his words "Perseverance, sympathy for the woe-begone, frugality, stubbornness, and integrity, together with an inclination to flout convention and a penchant for rigorous analysis." He worked hard, and contrasted himself to the rich an privileged, even going so far as to deliberately wear different clothes from them. A contrarian to the core, even when it was not necessarily the smart move.
Question 3: What are your favorite Neff investments? Why?
Tandy, - here he broke out of his value mould, and actually held a stock for the ride. His returns were massive, dwarfing any other return that he talks about in the whole book. He was obviously impressed with the entrepreneurialism of Charles Tandy - he is the only manager in the book who gets such a positive write up, most managers are not even mentioned.
Question 4: What are your least favorite Neff investments? Why?
Citibank. He really should have known that banks are fundamentally high risk, cyclical, highly leveraged, and very vulnerable to conditions that their borrowers are facing. All banks lend against property, and after the property crash of 1989 there were some very ugly bad debts. Moreover banks are complicated and good at hiding problems in their loan books for longer than seems reasonable. He was also strangely surprised by the savings and loans crisis. Given that he worked in Wall St he should have been more alert to these kinds of issues. If I'm honest I think he started to be a little out of his depth as the fund grew and the world changed. The amount of cash he had coming in from new investors was greater than his ability to invest it, and his habit of selling out early did not help. His calls and performance in the 90's were not so strong, and I'm sure that is why he stopped in 1994 at the relatively young age of 63. Of the last two years he simply says "my final two years at Windsor were not stellar. Suffice it to say that we lagged the market by roughly six percentage points, all told, in calendar years 1994 and 1995" Normally investors like this go on seemingly forever, so to stop then is unusual. It would have fitted with his moral compass to stop when he knew that he could no longer do right by his investors and beat the market.
Question 5: What are 1 or 2 stocks that John Neff might find attractive in the current environment?
I've chosen TP ICAP Plc.
It's the largest inter-dealer and wholesale broker in the world across major asset classes like rates, FX, credit, oil, gas and power. It also has an equity trading network Liquidnet, and an ai/professional system Parameta Solutions.
I think it qualifies for inclusion because:
It's really cheap. PE 8.2 - he liked cheap
It pays a good dividend 6.4% - he liked divis
It has a huge free cash flow it trades on six times its cashflow. He liked this (and I like it more)
It is unloved because it has failed to list Parameta, which it said it would, and its business model is considered seriously under threat from AI. I also think that it suffers from being too close to the business of investing. It's noticeable that people prefer to invest in things that sound glamorous, complicated and which they know the right amount about, but not too much. I suspect most city folk are aware of this business from personal exposure, and assume that it is vulnerable. To be fair they may be right. But I think that Neff's contrarian streak and nose for a bargain would have been tempted.
Question 6: Come up with an AI prompt based on John Neff’s approach
Because Neff's approach is relatively mechanical, you can build a screener that will do this and give a list of candidates just as well as AI
"come up with a search prompt for you to seek out companies that John Neff would have thought were good investments"
provided 5 answers, one UK focussed:
"Search the UK market (FTSE 350 + AIM where appropriate) for John Neff–style opportunities: single-digit to low-teens P/E, dividend yield ≥ 3–4%, not obviously impaired, cash generative, and evidence of capital discipline (progressive dividend, buybacks, or consistent special dividends). Include recently out-of-favor names (price down vs 1–3y), but verify fundamentals are intact via annual report/RNS. Output 10 best candidates ranked with a short investment case and key risks, plus links to the relevant filings."
Results:
M&G plc — LSE: MNG
Legal & General Group plc — LSE: LGEN
Phoenix Group Holdings plc — LSE: PHNX
Imperial Brands plc — LSE: IMB
Aviva plc — LSE: AV.
NatWest Group plc — LSE: NWG
Plus500 Ltd — LSE: PLUS
IG Group Holdings plc — LSE: IGG
Taylor Wimpey plc — LSE: TW.
British American Tobacco plc — LSE: BATS
Because Neff's approach is relatively mechanical, you can build a screener that will do this and give a list of candidates just as well as AI.
Interesting point about Tandy. It has been a while since I read the book, thanks for pointing it out. I think to 'go for the ride' you need to have well-founded confidence in management, not just the business.
Q1. Usually a 3-5 year time horizon - a more frequent trader than most value investors. Neither a short or long term investor, favored "value" in paying for growth and the importance of a dividend. He uses "Measured Participation" to evaluate investment choices described by 4 categories - high growth, less recognized growth, moderate growth, and cyclical growth. Low as opposed to hi PE's, and growth at least 7% with yield protection - stocks with a dividend. Companies with superior relationship of total return to PE, solid companies in growing fields, companies with strong fundamentals, and he looks for total return.
Q2. He was able to use his challenging childhood to be able to adapt to a variety of circumstances. He was a continuous learner. Both of these qualities became extremely helpful as an investor who had both the ability and knowledge to adapt to changing market conditions.
Q3. It's interesting to see how many of these companies are no longer around. I like the oils, especially Exxon, which he didn't add until later and IBM. Simply because both companies could adapt and survive over time.
Q4. My least favorite is Citigroup mostly due to their corporate culture.
Q5. Eli Lily: may be overpriced now, but has some time on a couple of their weight loss drugs before they go generic. Constellation brands: they serve the Latino community especially
with some of their beers, and less people are drinking now - that may change.
Q6. Provide me with a list of companies with growth rates 7% and above, a dividend of at least 2%, single digit PE's, and double digit historical earnings growth.
The atmosphere of his early life was frugality and hard work. A "4 yard gain" is a win. You'll get hit in life. Be patient, get up, and do it again. Growing up in the Midwest around manufacturing, banks and cyclical industries normalized him to their challenges. He wasn't frightened by their ups and downs or turned off by their 'boring' unpopular natures. His experience working with his father taught him 'merchandise well bought was well sold' and that you didn't need a glamorous business to make money. His father practiced buying cheap and selling higher.
Q3:
Home Depot: When he caught it in 1986, the PE was temporarily depressed, down to PE 10 from PE 20 the prior year. The market was spooked about its profitability after expansion reduced profits. Looking at the numbers, he saw high ROIC for reasonable scaling expenses and 25% growth. He believed that would lead to profit that the market would eventually recognize and he was right.
Q4:
I can't say there was one that especially stood out as one I disliked. I recall a comment about how Texaco was not the best run company, but he bought it anyway. He seemed to get a good outcome on most all of the investments he mentioned.
Q5:
ADBE--Stable revenue machine, perhaps moving into a moderate growth range from high growth range and getting repriced. Company position in industry: Pricing power is strong, Market leader, high switching costs, investing in their own AI tools which have potential to bring in additional revenue. Unloved because of fears of AI disruption (possible market overreaction).
Earnings growing at 9% 5YR
Sales growing 13% 5 YR
ROE 55%, ROIC 39%, Operating margin 36% -- all solid or better for industry
5-year FCF positive trend
Healthy balance sheet
PE ~16 down ~40% from 52wk high
Q6:
First prompt (screen for unloved but growing)
Make a list of U.S. stock John Neff might find interesting. Use the following steps and output a list of tickers and reason why they are potential candidate.
Step 1:
Make a list of U.S. stocks with:
a) 5-year EPS growth CAGR 7–20%
b) 5-year revenue trend is growing
c) Pretax margins at or better than industry median.
d) ROE must be at or better than industry median
e) 5-year FCF positive trend
f) PE > 5 but at 40-60% of market average
Step 2:
From that list, find stocks that are beaten-down and unloved. Look for any of the following: has negative news sentiment, price within 20% of 52 week low, was a spinoff within the 1-2 years, low analyst coverage, declining institutional ownership, recent earnings miss.
Second Prompt (industry/cycle check)
For STOCK, answer the following questions.
a) Are an industry’s prices headed up, or are they headed down?
b) Are costs increase or decreasing?
c) Who are the market leaders in this industry?
d) Do any competitors dominate the market?
e) Can industry capacity meet demand?
f) Do they have new production capacity forthcoming? How will the new capacity affect profitability?
g) If cyclical, where in the cycle might it be? Is this a temporary dip?
Interesting to compare your 'dimensions' analysis vs. James's opinions. You guys should talk it out - would probably result in an interesting discussion that you both would walk away having learned a few things from. That's what I would do if this were a live class rather than over Substack.
Here he started with out of favour sectors or companies with low PEs. After that initial filter he looked at the quality and growth of the company. He would only buy if he thought it would fit into one of his Measured Participation categories:
1) Highly recognized growth
2) Less recognised growth
3) Moderate growth
4) Cyclical growth
Just cheap without any of these characteristics and he would ignore.
Debt
He sometimes bought companies with significant debts, like Owens Corning. The restructuring and heavy debt load frightened investors and he bought on a PE of 5.5. Sold for double.
Earnings vs assets.
While I can find very little direct reference to debt and assets in his assessment of companies I think he must have done his homework. He describes himself as an analyst, and a disciple of Graham in the first place, though he definitely does not think of himself as a value investor. He prefers the sobriquet "low price earnings investor". I find it hard to believe that he never considered the margin of safety provided by assets in his assessment of the risks of buying a beaten down stock, but he is unforthcoming about it in his book.
Buying well
One of the advantages of his approach is that once he was convinced a stock was cheap he set out to buy as well as possible, often buying on intraday lows. This means watching share prices and trends to get those lows, which implies a technical approach. Again he does not refer to this at all in his book.
One last point about his approach. It was very effective in a high inflation, high interest rate environment. PE's are a refection of the current earnings of the company. The future earnings are less important in this kind of environment. This was the ideal way to survive the 1970's with horrible and rapidly churning markets. As interest rates lowered through the 1980s and 1990s (and long after) the long term prospects of companies became much more valuable as they are discounted at a lower rate. This means a PE approach becomes less effective, and you need to be concentrating on future prospects instead of current earnings. On top of this, the acceleration of more ways to do business - Emails, mobile phones and outsourcing to China were particularly prevalent through the 1990's - meant that good companies began to have more ways to outperform their less forward looking peers. The combination of these factors makes the quality and future of the business relatively more important than the present PE numbers.
You make some great points here, thank you for sharing. Here are a few more general points that arose for me from our discussion.
What great investors do vs what they say they do.
One thing that has struck me again and again as we have gone through this course is how many investors don't actually do what they say they do in some areas. Or are not explicit about all aspects of their investment process. It's important if you choose to follow their style to take this into account. Neff is an example of this but it's true of most.
You rightly pointed out that Neff called himself a security analyst. But, when you read his process he was much more about business analysis. He bought very carefully, and I suspect sold equally carefully, by watching the market every day. Not referred to at all in his book. It was mentioned in the Money Masters, and makes sense when you think about it given his style.
Phil Fisher gives the impression that he was constantly on the phone to management, actually I think he hardly ever did this, being shy and retiring according to any source I could find, including his family.
Warren Buffet talks as if Benjamin Graham said it all, but actually he left Graham behind a very long time ago. He was loyal to his original mentor, and still used his principles when appropriate, but added a lot since.
Great investors are often suited to both their time and place.
You make the point that Neff liked things he was exposed to in his hometown like banks, cyclicals and industrials. I completely missed this. It's an example of another theme I have noticed in this reading series.
Neff.
A low PE approach worked well in high inflationary times where current earnings are relatively more important than future ones. 1969-1992 was the peak of this period, and he retired as interest rates fell and it no longer worked as well.
Graham. His approach to value worked excellently when financial information was limited, stocks were very cheap, and risk aversion ruled.
Phil Fisher. Starting in the 1920's some firms started to manage, research and invest in a much more recognizably modern way. This trend accelerated after the Second World War in the 1950's His approach revolved around spotting these well managed, high research, high growth companies who did very well in sectors now long mature like electronics and polymers.
We like to think that investment principles last for ever, and that is true but can also be misleading. The lesson here for me is that you must be an investor for your time. A harder inevitable corollary to this is to recognise when the times are changing, and either change w
Question 1:
“observers call me a contrarian, a rather vague label that suggests a stubborn nature. Personally, I prefer a different label: low price-earnings investor.”
John Neff can be mapped as a contrarian, value-driven investor who relied on low P/E ratios, strong fundamentals, and long-term compounding, while avoiding glamour stocks and emphasizing dividends. His style was disciplined, conservative, and focused on finding “unloved” companies with real earnings power.
Question 2:
From Caddying, paper delivery, soda fountain work, Neff learned the value of hard work and small, steady earnings rather than chasing glamour.
This struck me : “Working for my father at least taught me that you don’t need glamour to make a buck. Indeed, if you can find a dull business that makes money, it is less likely to attract competition. Also, merchandise well bought was merchandise well sold. “
Question 3:
“Ford, our largest holding at one time, which had increased its dividend by al- most 60 percent in just 6 months.”
Ford Motor Company as a clear example of his style. At the time, most investors avoided Ford because they worried about ups and downs in the car business, labor problems, and competition from overseas. Neff, however, noticed that Ford still had strong cash flow, paid good dividends, and had solid earnings that others were overlooking. He bought the stock when its P/E ratio was much lower than the market average, which gave him both safety and value. When the auto industry recovered, Ford’s strong business showed through, and the stock gave big returns to the Windsor Fund. Neff used this case to prove that even in industries with cycles, buying simple but profitable companies at the right price can lead to excellent long term results.
I also like buying an industrial name like “Borg Warner and the principal reason it was selling for 4.4 times 1979 earnings”
Question 4:
John Neff’s investment in Kmart turned out to be one of his least successful cases. He bought the stock because it looked cheap and fit his contrarian style, but probably he underestimated how quickly the biggies like Walmart and Target were taking over the retail market. stayed “cheap for a reason,” showing that even low P/E stocks can be value traps if the business itself is weak.
Question 5:
NSE: Ganesh Benzoplast John Neff liked companies that looked “dull but profitable,” with steady earnings and undervalued prices. Ganesh Benzoplast fits that idea because it runs a storage and logistics business for oil and chemicals—an industry that is not glamorous but has steady demand. Its valuation is still low compared to bigger logistics players. (Current PE:7)
NSE : Sigachi Industries Sigachi makes cellulose-based products used in pharmaceuticals and food , Neff liked companies with moderate and Sigachi has shown consistent expansion in demand for its products. The stock trades at reasonable valuations compared to high-growth pharma names, and its business model is simple and cash-generating. This kind of moderate growth, low valuation, and essential product line . (Current PE 14)
Question 6:
Search the Indian equity market (NSE + BSE listed companies, including midcaps and select smallcaps) for John Neff–style opportunities: single-digit P/E ratios, dividend yield ≥ 2%, earnings growth rates ≥ 7% annually, and double-digit historical earnings growth over the past 5–10 years. Focus on companies that are cash generative, not obviously impaired, and show evidence of capital discipline (progressive dividends, buybacks, or consistent special dividends). Include recently out-of-favor names (price down vs. 1–3 years), but verify that fundamentals remain intact via annual reports, investor presentations, or exchange filings
Dull (seeming) businesses can indeed be great, especially if well-run.
Question…
Neff’s sell strategy is different than Fisher. Neff buys wares to sell and “harvests” when the market has strong demand and the price is fair or higher. Neff is okay buying the same stock later on down the road and doing the same thing all over again. Fisher buys forever and counts on compounding for many years; he cautioned against buying and reentering later. Assuming there is not a “right way” to do it, why should an investor choose one method vs another? It appears that all work.
Neff tended to buy more mature businesses. Think of the equation: Change in stock price = change in business value + stock price going to business value + (noise). Fisher chose companies with a much larger first component whereas Neff focused more on the second component of the equation. Holding on for a long time usually requires *unexpected* value to continue to be created. Usually that is a result of attractive reinvestment economics.
Probably this where dimensions and style (see post #1 of this series) come into play.
Pick one(or few) which suits you and adjust accordingly.
I think that it comes down to discipline. A disciple is a follower of a way. As an investor you need to stick to your process. If you don’t you are constantly at risk of greed or fear overcoming your judgement. Neff sold when the price met his target as a defence against greed. Fisher looked always at the fundamentals and ignored the price, again as a way of avoiding being frightened out of a position prematurely by a plunge or a surge. Some use stop losses, to take the decision away from your inevitable biases, others use charts as a signal. Whatever process you decide to use you need to understand your own psychology and find your own way to deal with it. Then stick with it when one or both the two emotions are beating in your heart louder than a drum.
Love the discussion. Glad you guys are helping each other improve.
Beautifully put.
Thank you all for the thoughts; they are each helpful pieces in the puzzle.
Question 1: Please “map” Neff as an investor on as many dimensions of an investment style as possible.
https://datawrapper.dwcdn.net/Wm1kE/2/
Neff has one of the simplest investment styles we have studied, with an iron discipline. Buy when PE is cheap, sell when reasonably priced. Gradually move the money to new bets as the price target is reached.
Question 2: What about Neff’s background and circumstances made his approach the right one for him?
He was brought up tough and self reliant and was always a contrarian. In his words "Perseverance, sympathy for the woe-begone, frugality, stubbornness, and integrity, together with an inclination to flout convention and a penchant for rigorous analysis." He worked hard, and contrasted himself to the rich an privileged, even going so far as to deliberately wear different clothes from them. A contrarian to the core, even when it was not necessarily the smart move.
Question 3: What are your favorite Neff investments? Why?
Tandy, - here he broke out of his value mould, and actually held a stock for the ride. His returns were massive, dwarfing any other return that he talks about in the whole book. He was obviously impressed with the entrepreneurialism of Charles Tandy - he is the only manager in the book who gets such a positive write up, most managers are not even mentioned.
Question 4: What are your least favorite Neff investments? Why?
Citibank. He really should have known that banks are fundamentally high risk, cyclical, highly leveraged, and very vulnerable to conditions that their borrowers are facing. All banks lend against property, and after the property crash of 1989 there were some very ugly bad debts. Moreover banks are complicated and good at hiding problems in their loan books for longer than seems reasonable. He was also strangely surprised by the savings and loans crisis. Given that he worked in Wall St he should have been more alert to these kinds of issues. If I'm honest I think he started to be a little out of his depth as the fund grew and the world changed. The amount of cash he had coming in from new investors was greater than his ability to invest it, and his habit of selling out early did not help. His calls and performance in the 90's were not so strong, and I'm sure that is why he stopped in 1994 at the relatively young age of 63. Of the last two years he simply says "my final two years at Windsor were not stellar. Suffice it to say that we lagged the market by roughly six percentage points, all told, in calendar years 1994 and 1995" Normally investors like this go on seemingly forever, so to stop then is unusual. It would have fitted with his moral compass to stop when he knew that he could no longer do right by his investors and beat the market.
Question 5: What are 1 or 2 stocks that John Neff might find attractive in the current environment?
I've chosen TP ICAP Plc.
It's the largest inter-dealer and wholesale broker in the world across major asset classes like rates, FX, credit, oil, gas and power. It also has an equity trading network Liquidnet, and an ai/professional system Parameta Solutions.
I think it qualifies for inclusion because:
It's really cheap. PE 8.2 - he liked cheap
It pays a good dividend 6.4% - he liked divis
It has a huge free cash flow it trades on six times its cashflow. He liked this (and I like it more)
It is unloved because it has failed to list Parameta, which it said it would, and its business model is considered seriously under threat from AI. I also think that it suffers from being too close to the business of investing. It's noticeable that people prefer to invest in things that sound glamorous, complicated and which they know the right amount about, but not too much. I suspect most city folk are aware of this business from personal exposure, and assume that it is vulnerable. To be fair they may be right. But I think that Neff's contrarian streak and nose for a bargain would have been tempted.
Question 6: Come up with an AI prompt based on John Neff’s approach
Because Neff's approach is relatively mechanical, you can build a screener that will do this and give a list of candidates just as well as AI
"come up with a search prompt for you to seek out companies that John Neff would have thought were good investments"
provided 5 answers, one UK focussed:
"Search the UK market (FTSE 350 + AIM where appropriate) for John Neff–style opportunities: single-digit to low-teens P/E, dividend yield ≥ 3–4%, not obviously impaired, cash generative, and evidence of capital discipline (progressive dividend, buybacks, or consistent special dividends). Include recently out-of-favor names (price down vs 1–3y), but verify fundamentals are intact via annual report/RNS. Output 10 best candidates ranked with a short investment case and key risks, plus links to the relevant filings."
Results:
M&G plc — LSE: MNG
Legal & General Group plc — LSE: LGEN
Phoenix Group Holdings plc — LSE: PHNX
Imperial Brands plc — LSE: IMB
Aviva plc — LSE: AV.
NatWest Group plc — LSE: NWG
Plus500 Ltd — LSE: PLUS
IG Group Holdings plc — LSE: IGG
Taylor Wimpey plc — LSE: TW.
British American Tobacco plc — LSE: BATS
Because Neff's approach is relatively mechanical, you can build a screener that will do this and give a list of candidates just as well as AI.
Interesting point about Tandy. It has been a while since I read the book, thanks for pointing it out. I think to 'go for the ride' you need to have well-founded confidence in management, not just the business.
Q1. Usually a 3-5 year time horizon - a more frequent trader than most value investors. Neither a short or long term investor, favored "value" in paying for growth and the importance of a dividend. He uses "Measured Participation" to evaluate investment choices described by 4 categories - high growth, less recognized growth, moderate growth, and cyclical growth. Low as opposed to hi PE's, and growth at least 7% with yield protection - stocks with a dividend. Companies with superior relationship of total return to PE, solid companies in growing fields, companies with strong fundamentals, and he looks for total return.
Q2. He was able to use his challenging childhood to be able to adapt to a variety of circumstances. He was a continuous learner. Both of these qualities became extremely helpful as an investor who had both the ability and knowledge to adapt to changing market conditions.
Q3. It's interesting to see how many of these companies are no longer around. I like the oils, especially Exxon, which he didn't add until later and IBM. Simply because both companies could adapt and survive over time.
Q4. My least favorite is Citigroup mostly due to their corporate culture.
Q5. Eli Lily: may be overpriced now, but has some time on a couple of their weight loss drugs before they go generic. Constellation brands: they serve the Latino community especially
with some of their beers, and less people are drinking now - that may change.
Q6. Provide me with a list of companies with growth rates 7% and above, a dividend of at least 2%, single digit PE's, and double digit historical earnings growth.
Q1:
https://docs.google.com/document/d/e/2PACX-1vRC-AmMAnwJnfjAQB1XTwiJ217Umo28mYzAIqFgfbKX5qPNtrINJKCcHj_L-yX3tjkiaw39oUnvTQpq/pub
Q2:
The atmosphere of his early life was frugality and hard work. A "4 yard gain" is a win. You'll get hit in life. Be patient, get up, and do it again. Growing up in the Midwest around manufacturing, banks and cyclical industries normalized him to their challenges. He wasn't frightened by their ups and downs or turned off by their 'boring' unpopular natures. His experience working with his father taught him 'merchandise well bought was well sold' and that you didn't need a glamorous business to make money. His father practiced buying cheap and selling higher.
Q3:
Home Depot: When he caught it in 1986, the PE was temporarily depressed, down to PE 10 from PE 20 the prior year. The market was spooked about its profitability after expansion reduced profits. Looking at the numbers, he saw high ROIC for reasonable scaling expenses and 25% growth. He believed that would lead to profit that the market would eventually recognize and he was right.
Q4:
I can't say there was one that especially stood out as one I disliked. I recall a comment about how Texaco was not the best run company, but he bought it anyway. He seemed to get a good outcome on most all of the investments he mentioned.
Q5:
ADBE--Stable revenue machine, perhaps moving into a moderate growth range from high growth range and getting repriced. Company position in industry: Pricing power is strong, Market leader, high switching costs, investing in their own AI tools which have potential to bring in additional revenue. Unloved because of fears of AI disruption (possible market overreaction).
Earnings growing at 9% 5YR
Sales growing 13% 5 YR
ROE 55%, ROIC 39%, Operating margin 36% -- all solid or better for industry
5-year FCF positive trend
Healthy balance sheet
PE ~16 down ~40% from 52wk high
Q6:
First prompt (screen for unloved but growing)
Make a list of U.S. stock John Neff might find interesting. Use the following steps and output a list of tickers and reason why they are potential candidate.
Step 1:
Make a list of U.S. stocks with:
a) 5-year EPS growth CAGR 7–20%
b) 5-year revenue trend is growing
c) Pretax margins at or better than industry median.
d) ROE must be at or better than industry median
e) 5-year FCF positive trend
f) PE > 5 but at 40-60% of market average
Step 2:
From that list, find stocks that are beaten-down and unloved. Look for any of the following: has negative news sentiment, price within 20% of 52 week low, was a spinoff within the 1-2 years, low analyst coverage, declining institutional ownership, recent earnings miss.
Second Prompt (industry/cycle check)
For STOCK, answer the following questions.
a) Are an industry’s prices headed up, or are they headed down?
b) Are costs increase or decreasing?
c) Who are the market leaders in this industry?
d) Do any competitors dominate the market?
e) Can industry capacity meet demand?
f) Do they have new production capacity forthcoming? How will the new capacity affect profitability?
g) If cyclical, where in the cycle might it be? Is this a temporary dip?
Interesting to compare your 'dimensions' analysis vs. James's opinions. You guys should talk it out - would probably result in an interesting discussion that you both would walk away having learned a few things from. That's what I would do if this were a live class rather than over Substack.
OK, so I've put our dimensions into a sheet, and compared the two. I think Mr R wins on points!
https://datawrapper.dwcdn.net/KHBtV/1/
some learning points for me:
Depth of research
Here he started with out of favour sectors or companies with low PEs. After that initial filter he looked at the quality and growth of the company. He would only buy if he thought it would fit into one of his Measured Participation categories:
1) Highly recognized growth
2) Less recognised growth
3) Moderate growth
4) Cyclical growth
Just cheap without any of these characteristics and he would ignore.
Debt
He sometimes bought companies with significant debts, like Owens Corning. The restructuring and heavy debt load frightened investors and he bought on a PE of 5.5. Sold for double.
Earnings vs assets.
While I can find very little direct reference to debt and assets in his assessment of companies I think he must have done his homework. He describes himself as an analyst, and a disciple of Graham in the first place, though he definitely does not think of himself as a value investor. He prefers the sobriquet "low price earnings investor". I find it hard to believe that he never considered the margin of safety provided by assets in his assessment of the risks of buying a beaten down stock, but he is unforthcoming about it in his book.
Buying well
One of the advantages of his approach is that once he was convinced a stock was cheap he set out to buy as well as possible, often buying on intraday lows. This means watching share prices and trends to get those lows, which implies a technical approach. Again he does not refer to this at all in his book.
One last point about his approach. It was very effective in a high inflation, high interest rate environment. PE's are a refection of the current earnings of the company. The future earnings are less important in this kind of environment. This was the ideal way to survive the 1970's with horrible and rapidly churning markets. As interest rates lowered through the 1980s and 1990s (and long after) the long term prospects of companies became much more valuable as they are discounted at a lower rate. This means a PE approach becomes less effective, and you need to be concentrating on future prospects instead of current earnings. On top of this, the acceleration of more ways to do business - Emails, mobile phones and outsourcing to China were particularly prevalent through the 1990's - meant that good companies began to have more ways to outperform their less forward looking peers. The combination of these factors makes the quality and future of the business relatively more important than the present PE numbers.
https://docs.google.com/document/d/e/2PACX-1vT_qSuojVaPuHpIJ78K2fyM5Ib7119lSiUfT5Z8K2XRt289ySHY72qFKKXtcgkFN2f-55BMr5lGC9gz/pub
Good exercise! My adjustments in the link.
You make some great points here, thank you for sharing. Here are a few more general points that arose for me from our discussion.
What great investors do vs what they say they do.
One thing that has struck me again and again as we have gone through this course is how many investors don't actually do what they say they do in some areas. Or are not explicit about all aspects of their investment process. It's important if you choose to follow their style to take this into account. Neff is an example of this but it's true of most.
You rightly pointed out that Neff called himself a security analyst. But, when you read his process he was much more about business analysis. He bought very carefully, and I suspect sold equally carefully, by watching the market every day. Not referred to at all in his book. It was mentioned in the Money Masters, and makes sense when you think about it given his style.
Phil Fisher gives the impression that he was constantly on the phone to management, actually I think he hardly ever did this, being shy and retiring according to any source I could find, including his family.
Warren Buffet talks as if Benjamin Graham said it all, but actually he left Graham behind a very long time ago. He was loyal to his original mentor, and still used his principles when appropriate, but added a lot since.
Great investors are often suited to both their time and place.
You make the point that Neff liked things he was exposed to in his hometown like banks, cyclicals and industrials. I completely missed this. It's an example of another theme I have noticed in this reading series.
Neff.
A low PE approach worked well in high inflationary times where current earnings are relatively more important than future ones. 1969-1992 was the peak of this period, and he retired as interest rates fell and it no longer worked as well.
Graham. His approach to value worked excellently when financial information was limited, stocks were very cheap, and risk aversion ruled.
Phil Fisher. Starting in the 1920's some firms started to manage, research and invest in a much more recognizably modern way. This trend accelerated after the Second World War in the 1950's His approach revolved around spotting these well managed, high research, high growth companies who did very well in sectors now long mature like electronics and polymers.
We like to think that investment principles last for ever, and that is true but can also be misleading. The lesson here for me is that you must be an investor for your time. A harder inevitable corollary to this is to recognise when the times are changing, and either change w
with them, or, like John Neff, gracefully recognize it's time to stop.