John Neff – Why The Low P/E Strategy Works


If it’s one thing we love at The Acquirer’s Multiple it’s value investors and John Neff is a legend in the world of value investing.

Neff has referred to his investing style as a low price-to-earnings (P/E) methodology. He’s one of the best known mutual fund investors ever, notable for his contrarian and value investing style as well as heading Vanguard’s Windsor Fund.

Windsor was the best performing mutual fund during his tenure and became the largest fund closing to new investors in the 1980s. Neff retired from Vanguard in 1995. During Neff’s 31 years, from 1964 to 1995, Windsor returned 13.7% annually versus 10.6% for the S&P 500.

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I recently read one of the best Neff interviews on the CFA Institute website.

Here’s an abstract from the Neff interview on the CFA Institute website:

Question: Can you offer some advice, some thoughts, or some enduring principles that have worked for you that are still relevant?

Neff: Well, certainly, the low-P/E strategy that I have been discussing continues to provide excellent odds. With Windsor, we were typically 50–60 percent of the market P/E. You do not have to be a magician to discover those stocks, but you do have to be pretty good at pursuing and analyzing them. And you have to stay on top of your analysis.

Usually, we would have a total return (growth rate plus yield) that was very competitive. About 200 bps of that performance was from a superior yield. In other words, the market would give us that yield, in effect, for nothing.  Stocks sell on their growth rate. So, our strategy incorporated a built-in advantage. I thought this advantage was gone three years ago, but it is coming back.

You can buy Citigroup with a 3 percent yield, which is 50 percent better than the DJIA and about 100 percent better than the S&P 500, with a 13–14 percent growth rate (my calculation). So, there are still stocks that provide a yield advantage. Keep in mind, however, that not all low-P/E stocks are attractive. Some of them are fundamentally poor companies in poor industries.

So, you have to pick the best of the bunch based on your analysis. And you do have to set some targets—your expected growth rate and how you think the market will eventually respond. If the investment is not measuring up to your expectations a year later, you have to readdress your analysis to make sure you do not have a fundamentally deteriorating situation.

Question: What is the difference between a value manager and a low-P/E manager?

Neff: Value is in the eye of the beholder. Low P/E is easily calculated and definitive.

Question: In low-P/E investing, how do you decide when you are right and what is your sell discipline?

Neff: We focus on total return, which, of course, is defined as growth plus dividend yield. In the olden days, we had a lot of 7 percent growers with a 7 percent yield. As a matter of fact, we had a big position (17 percent) in the regional Bells when they first were born in the mid-1980s. NYNEX Corporation, which was the Baby Bell in New York and New England, had a 9 percent yield.

So, we could determine total return. It was a 9 percent yielder, with a 7  percent growth rate selling for 60 percent of the market multiple. We were projecting that it would go to an 82 percent market multiple at some point in the future, so we set up an appreciation screen model accordingly. We determined that we were getting two times total return relative to the market multiple.

In other words, NYNEX was trading at 7–8 times earnings with a 9 percent yield and 7 percent growth, and thus 16 percent in total return (or more than twice its market multiple of 7 times). Admittedly, that is kind of hard to find these days.


To read the full Neff interview on the CFA Institute website click here, A Conversation with Legendary Value Investor John B. Neff, CFA.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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