The turbulent markets of 2014 and early 2015 have proved tricky for a number of my favourite stock screens, but not so for my John Neff-inspired screen. The seven stocks picked by the screen a year ago generated a 27.8 per cent total return compared with 7.2 per cent from the FTSE All-Share over 12 months. What's more, since I started running the screen in 2012 it has delivered significant outperformance every year and the cumulative total return from the strategy over the three years now stands at a whopping 135 per cent, excluding costs and spreads, compared with 38 per cent from the market. If a 1 per cent charge is factored in for costs, the total return is 128 per cent.
The strong run from the Neff screen can be expected to come to an end at some point, and the screen was not unscathed by last year's market volatility. Looked at on a stock-by-stock basis (see table), two of the seven stocks selected in 2014 had negative total returns as sentiment soured towards the sectors they hail from (oil services and mail). Still, the screen avoided focusing heavily on the market's disaster zones.
| Name | TIDM | Total return (28 Jan 2014 - 2 Feb 2015) |
|---|---|---|
| Staffline | STAF | 76% |
| Provident Financial | PFG | 67% |
| JD Sports Fashion | JD. | 29% |
| Pennant Int. | PEN | 22% |
| S&U | SUS | 21% |
| John Wood Group | WG. | -6.3% |
| UK Mail | UKM | -15% |
| Average | - | 28% |
| FTSE All Share | - | 7.2% |
Source: Thomson Datastream
The investment techniques espoused by John Neff, who found fame during his exemplary 31 years at the helm of the Vanguard Windsor fund, focus on finding reliable, unflashy shares which were particularly suited to a buy-and-hold investment approach. Indeed, the criteria my screen uses requires that stocks are outside the cheapest and most expensive quarters in order to filter out stocks that look suspiciously cheap or where the valuation is too racy. Mr Neff's main valuation criteria can be described as a dividend-adjusted price-earnings-growth (PEG) ratio. This looks at how much investors are being asked to pay for a company's earnings and compares it with expected earnings growth and the dividend to be received.
Neff's price-to-total-return (PE/TR) ratio: Price-to-earnings ratio (PE)/Earnings growth rate (EPS growth) plus dividend yield (DY) Mr Neff actually likes to express this formula as a yield, however, I've chosen to flip it on its head so it resembles a PEG ratio, which is likely to be more familiar to most UK investors. In the formula I use a historic PE and DY. EPS growth is the average of the five-year compound annual growth rate (CAGR) and the average forecast EPS growth rate for the next two fiscal years. |
Given the long-term nature of Mr Neff's approach, it seems fitting to look at the longer-term performance of the 2012 and 2013 screens to date. And while the performance from the screens is not as impressive as the cumulative returns based on switching from one year's portfolio to the next, the returns are still very impressive.
2013 Neff Stocks
| Name | TIDM | Total return (28 Jan 2013 - 2 Feb 2015) |
|---|---|---|
| Kentz Corp | KENZ | 122%* |
| Whitbread | WTB | 101% |
| Sports Direct Int. | SPD | 78% |
| Dignity | DTY | 56% |
| Admiral | ADM | 39% |
| Wynnstay | WYN | 28% |
| Sky | SKY | 24% |
| Average | - | 64% |
| FTSE All Share | - | 18% |
*Taken over
2012 Neff Stocks
| Name | TIDM | Total return (31 Jan 2012 - 2 Feb 2015) |
|---|---|---|
| London Stock Exchange | LSE | 215% |
| Synergy Health | SYR | 167% |
| Savills | SVS | 141% |
| Diploma | DPLM | 113% |
| Aberdeen Asset Management | ADN | 111% |
| N Brown | BRWN | 110% |
| Admiral | ADM | 103% |
| WS Atkins | ATK | 96% |
| Capita | CPI | 94% |
| Dechra Pharma | DPH | 93% |
| Maintel | MAI | 92% |
| Alternative Networks | AN. | 90% |
| Informa | INF | 50% |
| Melrose | MRO | 39% |
| G4S | GFS | 15% |
| Xstrata | XTA | -9% |
| Average | - | 95% |
| FTSE All Share | - | 38% |
Source: Thomson Datastream
This year, the screen faces a noteworthy difficulty: it has become increasingly difficult to find stocks that meet all of the Neff screen's criteria. In fact, only three stocks from the entire FTSE All-Share have made the grade. This does not bode well for 2015, or at least means there is significantly more risk than you would get with a more diverse selection of stocks - but, as with most screens, idea generation is a primary objective of the screening exercise. However, all the three stocks making it through the screen are also rated a 'buy' by the Investors Chronicle based on the analysis of our specialist writers. The full Neff criteria are:
As well as the three stocks that passed all the Neff tests, I have included a table of the 15 shares that passed all but one of the tests (all must pass the lower-than-average PE/TR test, though). It has been suggested by a reader that the PE criteria I use in my Neff screen, specifically excluding stocks among the lowest quarter of PEs, perhaps goes a bit too far given Mr Neff's stated fondness for low PEs. I think there is justification in this view, however this year there are actually no shares that boast a bottom-quarter PE that qualify on all the other Neff criteria.
Three Neff buys
