In our most recent Validea Hot List newsletter, we highlight the investment philosophy of John Neff, who managed the Vanguard Windsor Fund from 1964 to 1995 (during which time the fund averaged a 13.7 percent return versus the S&P 500’s 10.6 percent). Neff’s strategy focused on the price-earnings ratio as a gauge of investor expectations for a company’s future growth—an important factor according to this market guru.

We explain the Neff methodology, founded on the notion that “high-flying growth stocks with high P/Es were very sensitive to any disappointment compared to expectations,” while he found low P/E stocks to have fewer expectations built into their pricing. As a result, according to Neff, there would be substantial upside potential if a company’s performance beat expectations but little downside in the wake of underperformance, “since Wall Street had already written them off.”

We outline other metrics central to the Neff-based philosophy including; sales growth, total return-to-price-earnings ratio, free cash flow, and persistence in earnings-per-share. Our newsletter concludes with an overview of performance of our Validea Neff-based portfolio.