For legendary investor John Neff, who managed Vanguard’s Windsor Fund from 1964 to 1995, a stock’s price-earnings ratio represented a measure of what level of growth investors are expecting a company to achieve in the future. This according to a recent Nasdaq article by Validea CEO John Reese.
The expectation factor, writes Reese, “was paramount for Neff, who found that high-flying growth stocks with high P/E’s were very sensitive to any disappointment compared to expectations.” But Neff saw the upside potential in this scenario if an investor was able to find those stocks that were unfairly beaten down.
Reese outlines the criteria he used to create his Neff-inspired stock screening model, and identifies four stocks that score highly according to this and others he developed based on the tenets of legendary investors:
- Penske Automotive Group Inc. (PAG) is an international transportation service company that scores well due to persistent growth in earnings-per-share and a favorable price-earnings ratio.
- Unum Group (UNM) is a provider of financial protection benefits in the U.S. and the U.K. that earns high marks based on the ratio of price-earnings to growth in earnings-per-share, as well as its equity-assets ratio.
- Essent Group Ltd. (ESNT) is a private mortgage insurance company with favorable annual earnings growth, price performance and return-on-equity.
- KB Financial Group Inc. (KB) is a Korea-based financial holding company that scores well based on price-earnings ratio and persistent growth in earnings-per-share.