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Friday, August 27, 2010

Total Return Ratio -- 11 stocks John Neff might have liked

John Neff, who beat the S&P by 3% over the course of 30 years while managing the Vanguard Windsor Fund, attributed much of his success to a metric he liked to use dubbed the "total return ratio." Here is the definition:

Total Return Ratio = (analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio

What is interesting about this equation is that it takes into account both earnings growth and dividends. In this era of ultra-low bond yields, stocks that pay dividends are gaining more and more importance. That makes this metric all the more interesting.

Let's break the equation down into its constituent parts.

Dividend Yield = most recent annual dividend / current share price

Finding the analyst expected earnings growth rate isn't as hard as it sounds -- it's built into PEG which is available for most stocks at Yahoo Finance.

PEG = PE / annual EPS growth rate

Annual EPS growth rate = PE / PEG

Now that we have all the pieces, we can calculate the Total Return Ratio as follows:

Total Return Ratio = ((PE / PEG) + dividend yield) / PE

Theoretically, the higher the ratio, the better the potential investment.

John Neff liked to find stocks whose TRR was 50% higher than that of the market or the sector.

Here, I used this equation to run a screen against my database of about 6000 stocks and simply picked the top 10 which turned into the top 11 because because two stocks tied for the tenth spot on the list.

Total Return Ratio Symbol Name Sector Industry Last Price PE PEG Dividend
20.00 SMP Standard Motor Products, Inc. Energy Industrial Machinery / Components $9.17 25.07 0.05 0.2
7.14 SNHY Sun Hydraulics Corp Capital Goods Metal Fabrications $22.99 36.48 0.14 0.36
6.67 GLNG Golar LNG Limited Consumer Services Marine Trans-portation $9.99 28.14 0.15 0.2
4.77 CVX Chevron Corporation Energy Integrated oil Companies $73.33 9.01 0.21 2.88
4.55 REP Repsol YPF S.A. Energy Integrated oil Companies $22.38 11.23 0.22 0.87
4.35 ALV Autoliv, Inc. Capital Goods Auto Parts: O.E.M. $52.88 13.65 0.23 1.2
4.17 MT ArcelorMittal Basic Industries Steel / Iron Ore $28.21 10.790.24 0.64
4.00 SNP China Petroleum & Chemical Corporation Energy Integrated oil Companies $78.83 7.27 0.25 2.86
3.85 NNI Nelnet, Inc. Finance Finance: Consumer Services $21.24 4.95 0.26 0.28
3.71 NM Navios Maritime Holdings Inc. Transportation Marine Transportation $5.29 7.21 0.27 0.24
3.71 NC NACCO Industries, Inc. Capital Goods Construction/ Ag Equipment/ Trucks $77.83 10.71 0.27 2.09

What do you think? Would you like to see this kind of list on a regular basis?

Do you have some familiarity with any of the stocks on this list that you would like to share with other readers? Then please leave a comment!

Note: This list is based on data gathered last weekend. We'll run this screen again after this coming weekend and see if we get some new candidates.

Disclosure: no positions

1 comment:

Inside Information Daily said...

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