In this week’s Validea Hot List newsletter, Validea CEO John Reese writes that “more and more of the world’s most successful investors — including many who correctly believed that the market was overvalued before its recent crash — are saying that stocks are now good values”. Among them are Jeremy Grantham, David Dreman, Jeremy Siegel, Bruce Berkowitz, Warren Buffett, and Marty Whitman. The fact that these gurus are seeing value in the market is a great sign, Reese says, especially given that many of them foresaw the recent crash.
The growing number of bullish gurus doesn’t necessarily mean we’ve hit a bottom, however, Reese adds, noting that markets often overshoot fair value not only on the way up, but also on the way down. But good long-term investors snatch up good values when they see them, whether the market is going to go up today, tomorrow, or a month from now, Reese says, and in the long run they are rewarded.
In the newsletter, Reese also takes a closer look at the Guru Strategy computer model that he bases on the writings of mutual fund star John Neff. During his 31-year tenure at the Windsor Fund, Neff averaged a 13.7 percent annual return, more than 3 percentage points per year better than the S&P 500. He did it by focusing on stocks with P/E ratios that were low, but not too low, because very low P/Es can often indicate that the company is a dog. He thus looked for P/Es that were 40 to 60 percent of the market average.
Neff’s strategy also looked for moderate, sales driven EPS growth. And he liked to see strong dividend payouts, because he found that stocks usually moved solely on their price appreciation potential, meaning that investors essentially got dividends for free. In fact, Neff says that about two-thirds of his 3 percent per year outperformance of the market was attributable to dividends. A favorite tool of his was the Total Return/PE ratio, which divides total return (EPS growth plus dividend yield) by a stock’s P/E ratio.
Among the current holdings in the 10-stock Validea Neff-based portfolio are:
- Forest Oil Corporation (FST)
- Guess?, Inc. (GES)
- General Dynamics (GD)
- Logitech International (LOGI)
- ConocoPhillips (COP)