10 unloved stocks
These picks meet the long-term value strategy of the legendary fund manager John Neff.
By John Reese, Validea
Over John Neff's 31-year tenure (1964-1995), the Windsor Fund averaged a 13.7% annual return -- a track record among the greatest ever for a mutual fund manager.
By focusing on beaten down, unloved stocks, he was able to find value in places that most investors overlooked. Here's a look at our 10 stock portfolio that is based on Neff's strategy.
How did Neff do it? He found that stocks with lower price-to-earnings ratios -- and lower expectations -- tended to outperform because any hint of improvement exceeded the low expectations investors had for them.
Similarly, stocks with high price-to-earnings ratios often flopped, because even strong results couldn't match investors' expectations.
Neff also preferred to see earnings growth between 7% and 20% per year, the kind of steady, unspectacular growth that could be sustained.
Sustainable growth also meant growth that was driven by sales -- not one-time gains or cost-cutting measures. Neff thus liked to see companies whose earnings growth and sales growth were rising at similar rates.
One more key aspect of Neff's strategy involved dividends. Neff used the Total Return-to-P/E ratio. This measure divides a stock's total return (that is, its earnings per share growth rate plus its dividend yield) by its price-to-earnings ratio.
He looked for stocks whose Total Return/PE ratios doubled either the market average or their industry average.
In recent years, my Neff-inspired model has been very stringent, with very few companies passing all of its tests. Here's a look at the stocks that currently make up my 10-stock Neff-based portfolio:
Discover Financial Services (DFS)
Spreadtrum Communications (SPRD)
The Buckle (BKE)
Valassis Communications (VCI)
CACI International (CACI)
Just like Neff himself, the Neff-based model often treads into the most unloved parts of the market. Many of its current holdings have a good amount of fear hanging over them, whether it be company-specific or industry-related.
Because of that, a value-focused strategy can languish for lengthy periods of time, and this strategy has struggled over the past couple years.
But Neff succeeded by staying disciplined and focusing on value. By ignoring the crowd and focusing on these firms' strong financials and fundamentals, I think the Neff model will end up benefiting significantly from many of these picks.
More from TheStockAdvisors
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Like many companies this winter, the fast-food giant blamed a drop in same-store sales on the weather. But could its problems be bigger than a snowbank?
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.