A recent article in Forbes highlights the value investing strategy of Josef Lakonishok, a professor-turned-money manager who founded the firm LSV Asset Management ($104 billion AUM).

“Lakonishok created a stir in the finance community through his research in the field of behavioral finance,” the article says, adding, “He questioned the notion of a completely efficient market and believes that there are inefficiencies investors can exploit in order to outperform the overall market.”

Here are key points about the Lakonishok approach outlined in the article:

• Investors are too optimistic in their expectations for growth stocks and too pessimistic in their outlook for value stocks, according to Lakonishok.
• His screening process begins by “developing a screenable universe of companies that is then viewed to find potential value pays” starting with companies with market caps of at least $500 million. Then the strategy eliminates (1) companies traded on the OTC market and (2) foreign companies traded on the U.S. exchanges (ADRs).
• The approach seeks potentially undervalued companies by comparing price-book, price-cash-flow, price-earnings and price-sales ratios to industry data. Lakonishok “seeks companies with at least one of these four ratios with a value less than that of the industry.”
• The main risk in value investing, says Lakonishok, is situations in which “the market’s recognition of value never materializes.” Therefore, he looks for value companies that are beginning to show some sign of movement, either in terms of price movement or in terms of improving analyst estimates.” He reviews stock price movements over the past six months and tracks analyst sentiment “as a gauge of whether company prospects are improving.”

The article concludes with a list of 25 stocks that pass the Lakonishok screen.