John Neff?s an investor who not many outside of investing circles might know of, but he?s actually one of the greats in the business.
Neff made his name while managing the Windsor fund in the U.S. from 1964 to 1995. During his tenure, he successfully posted a 57-fold increase for every dollar invested in his fund. The fund?s annualized return of 13.7% handily beat the S&P 500?s (an American market index) return of 10.6% over the same timeframe.
In his book John Neff on Investing, the investing master laid out seven principal elements of his investing style. Three of these elements are particularly…
John Neff’s an investor who not many outside of investing circles might know of, but he’s actually one of the greats in the business.
Neff made his name while managing the Windsor fund in the U.S. from 1964 to 1995. During his tenure, he successfully posted a 57-fold increase for every dollar invested in his fund. The fund’s annualized return of 13.7% handily beat the S&P 500’s (an American market index) return of 10.6% over the same timeframe.
In his book John Neff on Investing, the investing master laid out seven principal elements of his investing style. Three of these elements are particularly useful to help you find the next potential winner. From these principles, three criteria can be created to screen Singapore’s stock market for opportunities.
a) Low Price-to-Earnings (PE) ratio
Neff preferred shares which have a PE ratio lower than the overall market’s as that generally provided excellent upside while giving solid downside protection.
The current price-to-earnings ratio for the SPDR STI ETF (SGX: ES3) is 13.6; the ETF (exchange-traded fund) tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI). Therefore, our first criterion for the screen would be a PE ratio lower than 13.6.
b) Fundamental growth in excess of 7%
In his second principle, Neff demanded persistent increments of earnings growth of between 7% and 20%. He felt that growth rates higher than 20% carried too much risk and might not be sustainable. With persistent increments in mind, we can use the historical five year annualized EPS growth in that same range as our second criteria.
c) Yield protection
One of the defining approaches of Neff’s investing style was his insistence on a dividend. As he saw it, “a superior yield at least lets you snack on the hors d’oeuvres while waiting for the main meal”. The current yield for the SPDR STI ETF is 2.6%. Thus, our third criteria will be a yield that is higher than that.
Putting it all together
Using these criteria, Jardine Cycle & Carriage Limited (SGX: C07), Keppel Corporation Limited (SGX: BN4), and MTQ Corporation Limited (SGX: M05) were amongst the group of shares that made the cut. The relevant fundamentals of the trio are summarised below:
Source: Google Finance
Jardine Cycle & Carriage derives the bulk of its income from its 50.1% owned Indonesian unit, PT Astra. The Indonesian firm’s business operation covers automotive distribution, financials, heavy industrials, and agribusinesses. You can read more about Jardine Cycle & Carriage here. The company paid a dividend of US$1.08 per share in 2013 and has a market cap of S$14.9 billion.
Keppel Corp is an anchor component of the Straits Times Index and has a market cap of S$16.4 billion. The company’s bread and butter resides in its offshore and marine segment, where it is the largest offshore rig builder in the world. You can read more about Keppel Corp here. The company has paid a total dividend of S$0.42 per share over the last 12 months.
MTQ is an oil and gas equipment and services company that has operations in Singapore, Australia, and Bahrain. The S$175 million market cap company is involved in oilfield engineering, engine systems, and subsea marine services. You can read more about the company here. On a trailing twelve months basis, it paid a total dividend of S$0.04 per share.
There are currently over 700 companies listed in the SGX. Studying every company may prove to be too challenging for the individual investor. This is where using Neff’s principles can help by narrowing down the field to just a few.
Although the three criteria may not guarantee to churn out a winning share each time, it could still help us focus on opportunities that the market presents. In doing so, we might just have a higher chance of matching the investing master’s enviable record.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.