Who was John Neff?
John Neff ran the Vanguard Windsor Fund from 1964 until he retired in 1995. Over those 31 years the fund returned an average of about 13.7% a year against roughly 10.6% for the S&P 500 — beating the index by more than three points annually, compounded across three decades. That is one of the longest sustained outperformance records in the mutual fund industry, and Neff did it without buying the glamour stocks of the day. He called himself a "low price-earnings" investor and described the kind of company he wanted as fitting the fund's "cheapo" profile.
The contrarian idea
Neff bought stocks the market had given up on: solid businesses trading at a low price-earnings ratio because they were dull, temporarily troubled, or simply out of fashion. The discipline that kept this from becoming a value trap was that he insisted on real fundamentals underneath the cheap price — steady earnings and sales growth, and a dividend that paid him to wait. When the crowd eventually noticed the earnings, the P/E re-rated upward and Neff sold into the enthusiasm he had bought against.
His signature measure tied those pieces together in one number, sometimes called the total return ratio: add a company's expected earnings growth to its dividend yield, then divide by its price-earnings ratio. It is a dividend-adjusted version of the PEG ratio — you are paying for growth and income, and you want as much of both as possible for each unit of P/E. A high ratio meant you were being well paid for the growth you bought; a low ratio meant the market had already priced the optimism in.
What the screen looks for
- Dividend-adjusted PEG ratio no greater than half the median for the entire database — the core "cheap relative to growth-plus-yield" test.
- Estimated earnings-per-share growth between 7% and 20% — enough growth to matter, but not the runaway forecasts that invite disappointment.
- Five-year sales growth also between 7% and 20%, so the earnings growth is backed by a real top line rather than cost-cutting.
- Positive free cash flow over both the trailing twelve months and the last fiscal year.
- Operating margin at or above the industry median, over the same two periods — a check that the business is at least as efficient as its peers.
The pairing is deliberate: the low ratio finds cheapness, the growth and margin floors keep out the companies that are cheap because they deserve to be. Neff wanted bargains with a pulse, not falling knives.
What to keep in mind
Contrarian value asks you to be early and patient. Neff routinely bought stocks that kept falling before they turned, and he underperformed for stretches — value has spent much of the last fifteen years out of favor against growth. The screen surfaces candidates; it does not tell you why a stock is cheap. Read the story behind each name, and size positions for the possibility that the market stays skeptical longer than you expect.
Sources
John Neff on Investing, John Neff with S.L. Mintz, John Wiley & Sons, 1999.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.