Optimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, neutral sentiment and pessimism decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 2.0 percentage points to 34.6%. Bullish sentiment is below its historical average of 37.5% for the ninth time in 11 weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 0.4 percentage points to 18.9%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 30th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 1.6 percentage points to 46.5%. Bearish sentiment is unusually high and is above its historical average of 31.5% for the 34th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 3.5 percentage points to –11.8%. The bull-bear spread is below its historical average of 6.5% for the 11th consecutive week.

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This week’s special question asked AAII members how they believe the November midterm elections will impact stock prices.

Here is how they responded:

• I don’t expect a meaningful impact: 32.1%

• It depends on which party wins control of Congress: 28.2%

• The outcome will likely be bullish for stocks: 17.6%

• The outcome will likely be bearish for stocks: 15.3%

• Not sure/no opinion: 6.9%

This week’s Sentiment Survey results:

Bullish: 34.6%, up 2.0 points
Neutral: 18.9%, down 0.4 points
Bearish: 46.5%, down 1.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

See more Sentiment Survey results.

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Over the past 31 years (June 30, 1995, to June 30, 2026), momentum has posted a 35.4% annualized return during economic regimes characterized by rising growth and rising inflation, nearly double the S&P 500 index’s performance in those same periods. The S&P 500 Momentum is tracked by Invesco S&P 500 Momentum ETF (SPMO).

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Momentum is one of several “factors”—traits of stocks found to explain performance beyond what market risk alone can account for. The AAII Model Shadow Stock Portfolio is a long-running factor-based portfolio. It targets both the size factor (smallest 10% of all exchange-listed stocks) and the value factor [price-to-book-value (P/B) ratios in the lowest 10% of all exchange-listed stocks]. The portfolio is based on the seminal 1993 Journal of Financial Economics paper by Nobel laureate Eugene Fama and Dartmouth College professor Kenneth French, “Common risk factors in the returns on stocks and bonds.”

Many other factors have been identified in the decades since the paper’s publication. S&P Global looked at seven factors used by S&P 500 subset indexes to track performance.

Momentum, measured by the S&P 500 Momentum, realized the highest annualized return over the entire 31-year period: 13.7%. This long-term figure reflects performance across all economic environments, including the regimes where momentum has struggled. The index seeks stocks with the strongest risk-adjusted price returns over the past 12 months, with the most recent month excluded.

Quality, measured by the S&P 500 Quality index, trailed the S&P 500 Momentum’s annualized return by three basis points (13.70% versus 13.73%) but realized the highest risk-adjusted performance at 0.97, meaning it delivered the most return per unit of volatility. The index seeks stocks with high return on equity (ROE), low accruals and low financial leverage. It is tracked by Invesco S&P 500 Quality ETF (SPHQ).

Neither factor consistently led throughout the entire period. Rather, different factors performed better or worse depending on the economic regime.

• Rising Growth and Rising Inflation: This most closely reflects our current economic regime. As noted above, momentum has historically performed the best during such periods, with an annualized return of 35.4% versus 20.0% for the S&P 500.

• Rising Growth and Falling Inflation: Both the S&P 500 Pure Growth index and the S&P 500 Pure Value index have led when economic growth is rising but inflation is falling. During this type of regime, they realized annualized returns of 35.3% and 34.3%, respectively, versus 27.4% for the S&P 500. Economic expansion combined with slowing price increases boosts profits. These indexes are tracked by Invesco S&P 500 Pure Growth ETF

• (RPG) and Invesco S&P 500 Pure Value ETF

• (RPV).

• Falling Growth and Falling Inflation: The S&P 500 Low Volatility index has fared well when both economic growth and inflation are slowing. During such periods, the index has realized an annualized return of 8.9%, versus 3.0% for the S&P 500, due to its defensive characteristics. The S&P 500 Low Volatility targets stocks that experience smaller price movements. These tend to be stable companies that are less economically sensitive. The index is tracked by Invesco S&P 500 index Low Volatility ETF

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• (SPLV). Quality has also fared well in this type of environment.

• Falling Growth and Rising Inflation: This is the worst type of environment for investors, and for consumers too. Low volatility’s defensive characteristics have enabled it to be the only factor of the seven analyzed here to have a positive annualized return for this regime. The S&P 500 Low Volatility returned 4.3%, versus –10.1% for the S&P 500.

It is worth noting that quality never ranked last or next to last in terms of performance across any regime. This supports the notion of seeking fundamentally sound companies regardless of the current economic regime. Quality also pairs well with other factors, including value, growth, size and momentum. All AAII model portfolios incorporate a quality element in their rules.

In terms of factors, there is an argument for diversification, as no single factor outperforms all the time. All the factors mentioned here can be used alongside a broad market index fund—such as one tracking the S&P 500—if you prefer to tilt toward a specific factor rather than fully committing to it.

More on AAII.com

• Using Momentum to Spot Outperforming Stocks
  The just-released October 2026 AAII Journal shows where to find momentum data on the AAII website and how to incorporate momentum into your investing strategy.

• An Opportunistic, and Disciplined, Approach to Small-Cap Investing
  Inside tips from a fund manager on finding good companies trading at reasonable valuations that can be owned for the long term.

• The Eight Metrics AAII Uses to Identify Quality Stocks
  AAII’s A+ Quality Grade encompasses a comprehensive set of financial indicators to identify high-quality stocks.

  
  AAII Sentiment Survey

Optimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, neutral sentiment and pessimism decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 2.0 percentage points to 34.6%. Bullish sentiment is below its historical average of 37.5% for the ninth time in 11 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 0.4 percentage points to 18.9%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 30th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 1.6 percentage points to 46.5%. Bearish sentiment is unusually high and is above its historical average of 31.5% for the 34th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 3.5 percentage points to –11.8%. The bull-bear spread is below its historical average of 6.5% for the 11th consecutive week.

This week’s special question asked AAII members how they believe the November midterm elections will impact stock prices.

Here is how they responded:

• I don’t expect a meaningful impact: 32.1%

• It depends on which party wins control of Congress: 28.2%

• The outcome will likely be bullish for stocks: 17.6%

• The outcome will likely be bearish for stocks: 15.3%

• Not sure/no opinion: 6.9%

This week’s Sentiment Survey results:

Bullish: 34.6%, up 2.0 points
Neutral: 18.9%, down 0.4 points
Bearish: 46.5%, down 1.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

See more Sentiment Survey results.

AAII Asset Allocation Survey

Individual investors’ allocations to cash decreased while stock and bond allocations increased in the September AAII Asset Allocation Survey.

Stock and stock fund allocations increased 0.7 percentage points to 71.8%. Stock and stock fund allocations are above their historical average of 61.5% for the 76th consecutive month.

Bond and bond fund allocations increased 0.3 percentage points to 14.9%. Bond and bond fund allocations are below their historical average of 16.0% for the seventh consecutive month.

Cash allocations decreased 1.0 percentage points to 13.3%. Cash allocations are below their historical average of 22.5% for the 46th consecutive month.

September AAII Asset Allocation Survey results:

• Stocks and Stock Funds: 71.8%, up 0.7 percentage points

• Bonds and Bond Funds: 14.9%, up 0.2 percentage points

• Cash: 13.3%, down 1.0 percentage points

September AAII Asset Allocation Details:

• Stocks: 33.4%, down 0.0 percentage points

• Stocks Funds: 38.3%, up 0.7 percentage points

• Bonds: 5.7%, up 0.6 percentage points

• Bond Funds: 9.1%, down 0.4 percentage points

Historical averages:

• Stocks/Stock Funds: 62.0%

• Bonds/Bond Funds: 16.0%

• Cash: 22.0%

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Featured Tickers: CTSH, EPAM, IT

This week, we use AAII’s A+ Investor Stock Grades to provide insight into three information technology (or, IT) services stocks. With increased investments creating growth opportunities within the IT services industry, should you consider the three stocks of Cognizant Technology Solutions Corp. (CTSH), EPAM Systems Inc. (EPAM) and Gartner Inc. (IT)?

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IT Services Stocks Recent News

The IT services industry is entering a sustained growth phase as enterprises accelerate cloud migration and digital transformation efforts. An article by Grand View Research reports that the global IT services market was valued at $1.6 trillion in 2025 and is projected to grow to $3.3 trillion by 2033, reflecting a compound annual growth rate (CAGR) of 8.9%. North America led the industry with a 35% share of global revenue in 2025, driven by mature infrastructure and strong enterprise adoption of digital technologies, while Asia Pacific is expected to be the fastest-growing region going forward. Rising cyber threats and stricter data protection requirements are pushing organizations to increase spending on managed security services and compliance-driven IT solutions. The reactive IT services segment held the largest share of the market in 2025 at over 51%, as the importance of minimizing system disruptions of complex IT infrastructures forces organizations to invest in rapid-response solutions.

The report points out several forces that are converging to deepen enterprise reliance on outside IT providers. The growing adoption of artificial intelligence (AI) and automation is reshaping how businesses operate. At the same time, the shift toward remote and hybrid work has increased demand for secure collaboration tools and scalable digital infrastructure, while expanding IT adoption is driving further need for integrated network management. Retail stands out as the fastest-growing end-use segment, expected to grow at a 10.7% CAGR by 2033, as companies invest in customer relationship management (CRM) platforms and advanced inventory systems to improve efficiency, agility and customer satisfaction. Given the converging trends toward AI adoption, security spending and cloud infrastructure, should you invest in Cognizant Technology, EPAM Systems and Gartner?

Sign Up to Receive a Free Special Report That Shows How A+ Investor Grades Can Help You Make Investment Decisions

Grading IT Services Stocks With AAII’s A+ Stock Grades

When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three IT services stocks—Cognizant Technology, EPAM Systems, and Gartner—based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three IT Services Stocks

What the A+ Stock Grades Reveal

Cognizant Technology Solutions Corp. (CTSH) is a global professional services and digital transformation company with operations in the U.S., Europe and Asia Pacific. It offers IT, consulting and business process outsourcing services for clients across a broad range of industries, including financial services, healthcare, manufacturing and retail. Cognizant Technology provides a broad range of technology services, including application development and maintenance, cloud computing, AI, cybersecurity, and enterprise resource planning implementation. It also offers consulting, digital engineering and industry-specific solutions that help organizations modernize their technology infrastructure, automate business processes and accelerate their digital transformation journeys. The company was founded in 1994 and is headquartered in Teaneck, New Jersey.

Cognizant Technology has a Value Grade of A, based on its Value Score of 82, which is deep value. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). For these value metrics, a lower rank is more attractive. The company has a price-earnings ratio of 12.2, ranking in the 29th percentile among all U.S.-listed stocks. It also has a shareholder yield of 7.6%, ranking in the 9th percentile.

Cognizant Technology has a Quality Grade of A, based on a score of 86, which is very strong. Higher-quality stocks possess traits associated with upside potential and reduced downside risk. The Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. To be assigned a Quality Score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

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The company ranks strongly in terms of its return on invested capital and return on assets. Its return on invested capital is 62.8%, which ranks in the 90th percentile and is above the sector median of 18.7%. Its return on assets is 10.8%, which ranks in the 88th percentile and is above the sector median of 0.9%.

EPAM Systems Inc. (EPAM) is a global digital transformation and software engineering company operating in the U.S., Europe, Asia and beyond. It offers software product development, digital platform engineering and technology consulting services for clients across the financial services, healthcare, life sciences, retail and media industries. EPAM Systems provides a broad range of technology services, including custom software development, cloud migration, data analytics and AI. It also offers industry-specific digital solutions and agile consulting services, helping organizations accelerate innovation, modernize legacy systems and build scalable digital products. The company was founded in 1993 and is headquartered in Newtown, Pennsylvania.

EPAM Systems has a Growth Grade of A, which is very strong. The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. EPAM Systems has a five-year annualized sales growth rate of 15.5% and has generated positive annual cash from operations in the past five consecutive years.

Earnings estimate revisions indicate how analysts view a firm’s short-term profits. The company has an Earnings Estimate Revisions Grade of B, based on a score of 65, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months. The company reported a positive earnings surprise of 7.6% for second-quarter 2026, and in the prior quarter reported a positive earnings surprise of 3.8%. Over the last three months, the consensus earnings estimate for third-quarter 2026 has decreased from $3.451 to $3.404 per share, while the consensus earnings estimate for full-year 2026 has increased from $13.062 to $13.151 per share.

EPAM Systems has a Quality Grade of A, based on a score of 95, which is very strong. The company ranks strongly in terms of its buyback yield and return on assets. Its buyback yield is 7.3%, ranking in the 94th percentile, and its return on assets is 8.7%, ranking in the 84th percentile.

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Gartner Inc. (IT) is a global research and advisory company operating globally. It offers actionable research, data analytics, consulting and conference services for senior executives and their teams across technology, finance, human resources, legal and supply chain functions. The company operates through three segments: research, conferences and consulting. Gartner provides a broad range of subscription-based research and advisory services, delivering insights, benchmarks and peer networking opportunities to help business leaders make informed decisions on technology investments. It also hosts large-scale global conferences, including its flagship Gartner IT Symposium/Xpo events, and provides specialized consulting and benchmarking services to help organizations optimize their technology and business performance. The company was founded in 1979 and is headquartered in Stamford, Connecticut.

The company has a Momentum Grade of B, based on its Momentum Score of 63. This means that the stock’s momentum is strong in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 94, 20, 11 and 47, sequentially from the most recent quarter, with higher ranks signaling stronger price momentum. The weighted four-quarter relative price strength is 0.9%.

The company has a Growth Grade of A, which is very strong. Gartner has a five-year annualized sales growth rate of 9.6% and has generated positive annual cash from operations in the past five consecutive years.

The company has a Quality Grade of A, based on a score of 81, which is very strong. The company ranks strongly in terms of its buyback yield and gross income to assets. Its buyback yield is 13.8%, ranking in the 98th percentile, and its gross income to assets is 62.6%, ranking in the 93rd percentile.

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Charles Rotblut leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Featured Tickers:IJR,IVV,PVFIX

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Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 3.9 percentage points to 32.7%. Bullish sentiment is below its historical average of 37.5% for the eighth time in 10 weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 1.3 percentage points to 19.2%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 29th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 5.2 percentage points to 48.1%. Bearish sentiment is unusually high and is above its historical average of 31.5% for the 33rd consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 9.1 percentage points to –15.4%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the 10th consecutive week.

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This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to increase interest rates by 0.25 percentage points.

Here is how they responded:

• It was the right move: 79.8%

• They should have left rates unchanged 12.4%

• They should have cut rates: 1.6%

• Not sure/no opinion: 6.2%

This week’s Sentiment Survey results:

Bullish: 32.7%, up 3.9 points
Neutral: 19.2%, up 1.3 points
Bearish: 48.1%, down 5.2 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

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As a reminder, the charts of interest highlight charts and tables I’ve come across that haven’t made their way into other AAII commentaries.

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Two More Rate Hikes This Year?

Federal Reserve chairman Kevin Warsh likes to keep his cards close to his vest, but federal funds rate traders are studying Fed officials for possible tells. As of this morning, the CME FedWatch Tool shows traders pricing in a nearly 50% chance of two more interest rate hikes by year-end.

Source: CME Group.

Mortgage Rates Rise to 7.03%

Rates on 30-year mortgages rose above 7% for the first time in 20 months, according to Freddie Mac. Rising yields on the 10-year Treasury are to blame. The higher mortgage rates make buying a house even less affordable for many people.

AI Remains Hungry for Capital

BlackRock continues to talk about the impact of AI spending in its weekly research notes. AI and data center expansion have accounted for about 14% of U.S. investment-grade bond issuance this year, up from 5% in 2025. In the chart below, AI spending is included in nonfinancial corporate debt (the pinkish bar directly above the green bar) and net corporate equity (the dark red bar at the bottom of each column).

Beyond the potential for fallout if defaults on this debt rise significantly, there is the ongoing crowding-out effect. Demand for debt is only so big. When enough capital flows into one part of the debt market, yields on other bonds will have to rise to attract investors.

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Fund Managers Fret About Disorder in the Bond Market

Bank of America’s recent survey of global fund managers found that they are fearful of a disorderly rise in bond yields upending the financial markets. The percentage of managers worried about the potential for the bond markets to create havoc has doubled since July to 33%. (In investing, a tail risk is a low-probability or atypical event that causes a severe downturn in the financial markets.)

Recency bias—the human mind’s tendency to put greater weight on recent events and information—does appear to be at play here. Even the so-called smart money is not immune from such behavioral patterns.

Source: Bank of America Global Fund Manager Survey and Sam Ro.

Diesel Is in the Headlines for All the Wrong Reasons

Diesel fuel prices do not typically get much attention, except among those who produce or buy it. But lately, it is constantly being mentioned by financial news outlets. Diesel fuel powers trucks, rail freight and marine shipping, and it’s used heavily in agriculture and construction. Higher diesel prices push through to nearly every category of consumer spending.

Diesel fuel set a new record high of $6.5276 per gallon on Tuesday, according to AAA. To put that number into perspective, here is the five-year trend from the St. Louis Federal Reserve’s FRED database.

While I was out running this morning, I noticed that the local Casey’s was charging $6.99 per gallon for diesel. The Marketplace radio program recently reported that diesel was over $8.00 per gallon in parts of California.

More Empty Seats at the Movies

Box office receipts totaled an estimated $4.76 billion between May 1 and Labor Day. The big haul made this year’s summer movie season the second-best ever recorded. This isn’t surprising given how expensive movie tickets have become. An adult ticket to see the new Resident Evil movie is $16.49 at my local AMC theater. It’s $23.49 to see it in IMAX.

Overshadowed by box office receipts is the declining number of butts in seats. Domestic theaters sold 30% fewer tickets between January 1 and August 16 this year relative to 2019, reported The New York Times. “That amounts to roughly 248 million missing admissions.”

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AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 3.9 percentage points to 32.7%. Bullish sentiment is below its historical average of 37.5% for the eighth time in 10 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 1.3 percentage points to 19.2%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 29th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 5.2 percentage points to 48.1%. Bearish sentiment is unusually high and is above its historical average of 31.5% for the 33rd consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 9.1 percentage points to –15.4%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the 10th consecutive week.

This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to increase interest rates by 0.25 percentage points.

Here is how they responded:

• It was the right move: 79.8%

• They should have left rates unchanged 12.4%

• They should have cut rates: 1.6%

• Not sure/no opinion: 6.2%

This week’s Sentiment Survey results:

Bullish: 32.7%, up 3.9 points
Neutral: 19.2%, up 1.3 points
Bearish: 48.1%, down 5.2 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

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This week, we cover AAII’s strategy that focuses on firms with a low price-to-sales (P/S) ratio relative to their historical average. Since inception in 1998, our Price-to-Sales screening model has an average annual price gain of 13.2%, versus the S&P 500 index’s 7.5% gain over the same period. Read on to find out how we put this screen together.

The Case for Revenue-Based Valuations

Screening for undervalued stocks based on the price-to-sales ratio (current price divided by the sales per share for the most recent 12 months) is not a new concept. The technique was originally popularized by Kenneth Fisher in the first edition of his book “Super Stocks” (Irwin Professional Publishing, 1984).

Revenue-based valuations are considered among the “cleanest” of all valuation methodologies. Revenues, or sales, are less impacted than earnings or book value by accounting decisions made by management and the corporate financial structure.

Sales levels tend to be more comparable across different firms—leading to a valuation tool that is more comparable from firm to firm within the same industry. Asset-based models such as low price-to-book-value (P/B) screens can be influenced by company factors such as specific depreciation schedules, age of assets and even inventory accounting methods. The market may not be able to properly adjust for these company-specific factors, which leads to mispriced securities.

There are two other big reasons revenue-based valuation methodologies have a following. First, they are among the least likely of all valuation measures to have a negative or otherwise unusable value. A temporary loss will make earnings-based valuation ratios meaningless. Second, revenue-based valuation measures tend to be less volatile than earnings-based valuation measures.

While the price-earnings (P/E) ratio, and versions of it, is the most popular valuation measure, revenue-based valuation methodologies should not be overlooked as a tool for assessing whether a company is inexpensive, fairly priced or expensive. Because these measures are less commonly used, they may lead you to stocks whose bargain valuations have not been uncovered by other investors.

Ranges for the Price-to-Sales Ratio

Investors normally seek out stocks with low valuation measures, such as the price-to-sales or price-earnings ratios, with the belief that the market may have overlooked a company or incorrectly assessed its value.

Stocks with low valuation levels may already be beaten down, so any good news can translate into higher stock prices. However, some industries traditionally sell with low price-to-sales ratios. Companies in these industries, such as supermarkets or firms with very poor sales growth prospects, typically have low profit margins (income divided by sales). A simple screen for just a low price-to-sales ratio will tend to turn up many of these firms. That is why we focus on companies with current price-to-sales ratios below their historical average and below the norm for their industry.

Price-to-sales levels are tied to expectations of future company growth, profitability and risk. The higher the expected growth, the higher the price-to-sales ratio that a stock can support. Higher profit margins also translate into high price-to-sales ratios. Profit margins measure the level of income produced for a given level of sales. Profits point to the company’s long-term growth and staying power.

Developing the Primary Price-to-Sales Filters

Price-to-sales ratios do not generally work very well with companies such as banks, real estate investment trusts (REITs) or other firms where ongoing sales are not a key driving force. Therefore, our first criteria exclude financial firms and REITs.

With banks and REITs excluded, we are left with the question of establishing an appropriate cutoff level for the price-to-sales ratio. Firms with low price-to-sales ratios are thought to be good prospects for future share price increases. With low price-to-sales stocks already beaten down, any good news can translate into higher stock prices.

As mentioned, some industries traditionally sell with low price-to-sales ratios. To help take industry factors into account, our filter looks for companies whose price-to-sales ratios are below the median for their industry.

Another approach for judging the relative level of the company’s price-to-sales ratio is to compare it against the historical levels for the firm. A ratio lower than its historical average would be a sign that the stock is potentially undervalued, while a ratio that is high compared to its historical average might indicate an overvalued firm. This approach assumes that the underlying growth and profit prospects of the firm have not changed drastically. Comparing a firm against its own average alleviates the problem of finding the correct fit in terms of industry group. Another advantage of this type of analysis is that it will not automatically rule out high-growth companies in high-growth industries as an absolute price-to-sales ratio will. The companies are ranked by how their current ratio compares to their average ratio over the last five years.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

Do you use the price-to-sales (P/S) ratio to identify potentially undervalued stocks? Why or why not?

Click here and then choose the Join Community button on the right to answer this question or read their responses.

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Conditioning Criteria

Even a stock with a low price-to-sales ratio is no bargain if it has no sales and earnings growth prospects. If a company has poor prospects, then it should trade with a low ratio. Optimally, an investor is looking for a growth company that has stumbled due to a temporary factor or a neglected company yet to attract the attention of Wall Street. The next criterion requires that the company have a growth rate in sales over the last five years greater than its industry median—identifying companies that have expanded their sales levels more quickly than other firms in their industry, yet that are trading at a discount to the industry norm.

A screening criterion using just growth rates can mask a great deal of variability. A close examination of the year-to-year figures, recent quarterly trends in sales and future prospects in sales growth should be part of the detailed analysis performed on the companies passing the screen. The other consideration is that an investor’s analysis must be looking forward to the firm’s future prospects.

Financial Leverage

A value screen for downtrodden stocks will reveal firms that might be somewhat troubled. As a safety hedge, many investors include a screen that establishes a maximum level of financial leverage. While the use of debt can help boost the return on equity (ROE) when the company is performing strongly, it can also saddle the company with interest payments that must be made throughout the business cycle, thereby slowing return on equity when business slows down and increasing the risk that the company may not be able to meet its interest payments.

Basic leverage screens look at factors such as debt relative to equity or liabilities relative to assets. Companies in more stable industries can safely assume greater levels of debt. The companies are screened for liabilities-to-assets ratios lower than their industry median. While leverage screens do not tend to turn up promising investments, they are helpful in highlighting troubled firms, especially if studied over time.

Relative Price Strength

Value screens often turn up firms that require patience from the investor waiting for the market to change its pessimistic view of the industry. A screen for high relative price strength can help to identify an improving stock outlook. A screen requiring a higher 52-week relative strength ratio than the industry median is specified. The relative strength ratio compares the company’s price performance to that of the S&P 500. Firms with positive relative strength ratios outperformed the S&P 500, while negative ratios reflect relative underperformance.

Firm Size

As companies get larger, their price-to-sales ratios normally get smaller. Once a firm reaches a large scale, it becomes increasingly difficult for it to sustain above-average growth rates. Lower price-to-sales ratios come with these lower prospects. At the other end of the scale, very small, high-growth firms in developing markets are difficult to incorporate into a value screen. These micro-cap stocks are also very illiquid stocks that carry high transaction costs. To exclude the very small end of the market, a minimum market capitalization of $50 million is specified as the final screen. As is true for any screen, the list of passing companies represents a crude starting point for further in-depth analysis.

Final Thoughts on the Price-to-Sales Approach

The price-to-sales ratio holds promise as a screening approach. It may identify undervalued firms sooner than the price-earnings approach and avoid some of the accounting complications of the price-earnings and price-to-book screens. But industry knowledge is crucial in judging price-to-sales ratios. Screens for low price-to-sales firms tend to be more industry-specific than price-earnings ratio screens.

25 Stocks Passing the Price-to-Sales Screen (Ranked by Price-to-Sales Ratio)

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Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

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Pessimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 9.2 percentage points to 28.8%. Bullish sentiment is below its historical average of 37.5% for the seventh time in nine weeks. Bullish sentiment was last lower on September 11, 2025 (28.0%).

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 4.8 percentage points to 17.9%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 28th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 14.0 percentage points to 53.3%. Bearish sentiment is unusually high and is above its historical average of 31.5% for the 32nd consecutive week. Bearish sentiment was last higher on May 1, 2025 (59.3%).

The bull-bear spread (bullish minus bearish sentiment) decreased 23.1 percentage points to –24.5%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the ninth consecutive week.

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This week’s special question asked AAII members how the current amount of cash in their portfolio compares with their normal allocation.

Here is how they responded:

• It is much higher than normal: 19.1%

• It is somewhat higher than normal: 31.3%

• It is about normal: 36.6%

• It is lower than normal: 10.7%

• Not sure: 2.3%

This week’s Sentiment Survey results:

Bullish: 28.8%, down 9.2 points
Neutral: 17.9%, down 4.8 points
Bearish: 53.3%, up 14.0 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

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The rate hike comes as energy prices continue to drive up the cost of many other items. Federal Reserve chairman Kevin Warsh specifically pointed to geopolitical unrest as a reason why interest rates were raised yesterday. Diesel prices—which are at a record $6.3956 per gallon on average, according to AAA—are having a particular ripple effect.

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This week’s interest rate hike was not surprising. If anything, it helped calm fears about Warsh’s independence and willingness to raise rates.

Interest rate hikes themselves are not necessarily bad for stocks, especially if they are expected. What the stock market does not like is shocks. The jump in inflation that occurred in 2022 was an example of a shock. Prices soared as post-pandemic consumer demand rebounded more strongly than supply chains could handle. This led to soaring inflation, higher bond yields and a bear market in stocks.

Fast forward to today, and we’re seeing the impact of oil exports being disrupted not only in the Strait of Hormuz but now also in the Red Sea, as Houthi rebels are blockading Persian Gulf oil from transiting the Bab el-Mandeb Strait.

Given the upward pressure on inflation, a rate hike was anticipated.

The updated forecasts from FOMC participants (aka the dot plot) suggest that another 0.25% rate hike could be announced at either the October or December meeting. The CME FedWatch Tool shows traders pricing in a 50% chance of a third rate hike occurring by the January meeting. The FOMC’s projections and traders’ expectations are subject to change.

According to Joe Kalish of Ned Davis Research, bond yields “are likely to be significantly lower six to 12 months from now” if yesterday’s rate hike turns out to be “a non-cycle (fewer than three hikes).” Kalish cited three such non-cycles where this pattern occurred: July 1971, April 1984, and March 1997.

Regardless of what happens next, shifts in monetary policy—especially small rate hikes like this—should not change your long-term investing strategy. Those seeking to make tactical changes around the edges of their portfolio should be careful not to chase after ships that have already sailed.

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There are opportunities in the current market for those with excess cash, maturing certificates of deposit (CDs) or maturing bonds. Yields on money market funds have risen. So have yields on CDs, preferred stocks and bonds—particularly those at the middle and longer end of the curve, which are offering juicier yields.

As far as stocks are concerned, corporate earnings are expected to remain strong. Overall, breadth remains good too, with both the S&P 500 Equal Weight index and the S&P SmallCap 600 index beating the S&P 500 index year to date. Foreign stocks—particularly those from developed countries—are also having a good year. As always, seek out profitable companies trading at attractive valuations.

Most importantly, remember that while you can’t control monetary policy, economic conditions or Mr. Market, you can choose to stay focused on following your long-term strategy.

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This week, we use AAII’s A+ Investor Stock Grades to provide insight into three marine transportation stocks. With increased fragmentation creating growth opportunities within the marine transportation industry, should you consider the three stocks of Navios Maritime Partners L.P. (NMM), Star Bulk Carriers Corp. (SBLK) and ZIM Integrated Shipping Services Ltd. (ZIM)?

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Marine Transportation Stocks Recent News

The marine transportation industry has become one of the best-performing corners of the market this year, and the disruption in the Strait of Hormuz is a big part of the story. A recent article by CNBC reported that a basket of 35 U.S.- and European-listed shipping stocks tracked by Lloyd’s List Intelligence is up about 68% year to date, more than five times the S&P 500 index’s gain, with crude-tanker stocks leading the pack, up 120% this year. With tankers forced onto longer routes and insurance costs climbing, effective vessel supply has tightened even as global trade volumes hold steady.

The article also flagged reasons for caution worth weighing before adding exposure to this industry. One analyst estimated that a meaningful chunk of the current valuation premium is essentially fear pricing tied to the ongoing disruption and warned that it could deflate quickly if conditions in the Strait of Hormuz normalize. However, even after any resolution, shippers that diversified routes and suppliers during the crisis may not lose ground.

For investors considering the marine transportation space broadly, the key question may be whether this rally reflects a temporary risk premium set to fade, or a more lasting repricing of an industry now seen as central to global supply-chain resilience. With marine transportation stocks seeing a major rebound in gains, should you invest in Navios Maritime Partners, Star Bulk Carriers and ZIM Integrated Shipping?

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Grading Marine Transportation Stocks With AAII’s A+ Stock Grades

When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three marine transportation stocks—Navios Maritime Partners, Star Bulk Carriers and ZIM Integrated Shipping—based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three Marine Transportation Stocks

What the A+ Stock Grades Reveal

Navios Maritime Partners L.P. (NMM) is a global shipping company operating across major international shipping routes in the U.S., Europe, Asia and beyond. It offers dry bulk and container vessel transportation services for commodity producers, traders and major industry charterers worldwide. The company operates through a diversified fleet of dry bulk vessels and container ships, serving customers across a broad range of cargo types and shipping markets. Navios Maritime Partners provides seaborne transportation services for a variety of commodities, including iron ore, coal, grain and fertilizers. The company was founded in 2007 and is headquartered in Monte Carlo, Monaco.

Navios Maritime Partners has a Value Grade of A, based on its Value Score of 95, which is deep value. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). For these value metrics, a lower rank is more attractive. The company has a price-earnings ratio of 6.0, ranking in the 6th percentile among all U.S.-listed stocks. Its enterprise-value-to-EBITDA ratio is 4.5, ranking in the 9th percentile.

The company has a Momentum Grade of A, based on its Momentum Score of 89. This means that the stock’s momentum is very strong in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 87, 69, 88 and 61, sequentially from the most recent quarter, with higher ranks signaling stronger price momentum. The weighted four-quarter relative price strength is 16.2%.

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Navios Maritime Partners has a Quality Grade of A, based on a score of 81, which is very strong. Higher-quality stocks possess traits associated with upside potential and reduced downside risk. The Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. To be assigned a Quality Score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

The company ranks strongly in terms of its return on assets and F-Score. Its return on assets is 7.4%, which ranks in the 80th percentile and is above the sector median of 3.1%. Its F-Score is 8, which ranks in the 92nd percentile and is above the sector median of 5. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position based on its profitability, leverage, liquidity and operating efficiency.

Star Bulk Carriers Corp. (SBLK) is a global dry bulk shipping company operating across major international trade routes in Europe, Asia, the Americas and beyond. It offers seaborne transportation services for dry bulk commodities to commodity producers, traders and industrial customers worldwide. The company operates one of the largest fleets globally, consisting of Newcastlemax, Ultramax and Supramax vessels. Star Bulk Carriers transports iron ore, coal, grain, bauxite, fertilizers and steel products, serving customers across major shipping lanes connecting key commodity-producing and commodity-consuming regions. It also provides fleet management, technical operations and commercial chartering services. The company was founded in 2006 and is headquartered in Athens, Greece.

The company has a Growth Grade of B, which is strong. The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. Star Bulk Carriers has a five-year annualized sales growth rate of 8.5% and has generated positive annual cash from operations in the past five consecutive years.

Earnings estimate revisions indicate how analysts view a firm’s short-term profits. Star Bulk Carriers has an Earnings Estimate Revisions Grade of B, based on a score of 69, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months. The company reported a positive earnings surprise of 30.8% for second-quarter 2026, and in the prior quarter reported a positive earnings surprise of 17.9%. Over the last three months, the consensus earnings estimate for third-quarter 2026 has increased from $1.151 to $1.184 per share. Over the last three months, the consensus earnings estimate for full-year 2026 has increased from $3.761 to $4.314 per share.

Star Bulk Carriers has a Quality Grade of A, based on a score of 87, which is very strong. The company ranks strongly in terms of its buyback yield and F-Score. Its buyback yield is 4.0%, ranking in the 87th percentile, and its F-Score is 9, ranking in the 98th percentile.

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ZIM Integrated Shipping Services Ltd. (ZIM) is a global container shipping and logistics company operating across major international trade routes in Asia, the Americas, Europe and the Mediterranean. It offers containerized cargo transportation and logistics solutions for importers, exporters, freight forwarders, and major retail and industrial customers worldwide. The company operates through an asset-light business model, utilizing a fleet of owned and chartered container vessels across a network of trade lanes connecting key global ports. It also offers value-added logistics services such as inland transportation, customs clearance and supply chain solutions, leveraging its proprietary digital tools to enhance customer experience and operational efficiency. The company was founded in 1945 and is headquartered in Haifa, Israel.

ZIM Integrated Shipping has a Value Grade of A, based on its Value Score of 86, which is deep value. The company has an enterprise-value-to-EBITDA ratio of 4.1, ranking in the 8th percentile. Its price-to-free-cash-flow ratio is 2.6, ranking in the 5th percentile.

The company has a Momentum Grade of A, based on its Momentum Score of 92. This means that the stock’s momentum is very strong in terms of its weighted relative strength over the last four quarters. The ranks are 84, 28, 94 and 88, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 18.5%.

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Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism increased and neutral sentiment remained unchanged.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.8 percentage points to 38.0%. Bullish sentiment is above its historical average of 37.5% for the second time in eight weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, was unchanged at 22.7%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 27th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 1.8 percentage points to 39.3%. Bearish sentiment is above its historical average of 31.5% for the 31st consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 3.6 percentage points to –1.4%. The bull-bear spread is below its historical average of 6.5% for the eighth consecutive week.

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This week’s special question asked AAII members which factor is most influencing their six-month outlook for stocks.

Here is how they responded:

• The economy and/or inflation: 37.5%

• Geopolitics: 28.6%

• Monetary policy/interest rates: 18.3%

• Valuations: 10.7%

• Other: 4.9%

This week’s Sentiment Survey results:

Bullish: 38.0%, down 1.8 points
Neutral: 22.7%, up 0.0 points
Bearish: 39.3%, up 1.8 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

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The formula is:
Coast FI = Target retirement savings ÷ (1 + Rate of return)^Years until retirement
Where: Target retirement savings = Annual withdrawals ÷ Safe withdrawal rate

Here is a simple example. Let’s say Jack, who is in his late 20s, wants to have more financial flexibility by age 35. He also thinks he will be able to live on savings withdrawals of $72,000 per year in today’s dollars when he retires at age 65. He will achieve that goal if he has $236,000 in savings by age 35, realizes an inflation-adjusted return of 7% and assumes an initial withdrawal rate of 4%. Combined, these factors should lead Jack to have $1.8 million in retirement savings at age 65. (We created a spreadsheet you can use to calculate your Coast FI number, or that of your relatives. Download it here.)

There are several assumptions built into this projection. First is Jack’s feasibility to save that much by age 35 after considering student loans, early career salaries, etc. Second, the potential for a below-average period of returns—and when those bad returns might occur—is ignored. Third, Jack is assumed to remain steadily invested regardless of how much volatility he faces or what personal financial challenges he incurs (unemployment, medical issues, etc.).

Forecasting retirement spending also brings its own challenges. Younger adults and even those entering middle age are unlikely to be familiar with required minimum distributions (RMDs), Medicare income-related monthly adjustment amounts (IRMAA) or the taxation of Social Security benefits.

Beyond the aforementioned issues, there are downsides to ceasing contributions to retirement savings. Future employer matching contributions end, along with the compounded returns on those contributions. The opportunity to use tax-advantaged vehicles becomes harder too. Roth accounts grow tax-free, while tax-deferred savings provide a tax deduction now. Even more important is the risk of a savings shortfall, which you may not realize until it becomes too late to make up for with portfolio returns alone.

The Coast FI number does have the benefit of providing an estimated savings amount a person can target. This number can serve as a useful initial goal to use in a wealth-building plan, such as our PRISM Wealth-Building Process. However, it is a target, not a singular point at which you can stop saving for retirement. You are always better off oversaving when you are young than trying to make up for a shortfall as you approach or live in retirement.

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AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism increased and neutral sentiment remained unchanged.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.8 percentage points to 38.0%. Bullish sentiment is above its historical average of 37.5% for the second time in eight weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, was unchanged at 22.7%. Neutral sentiment is unusually low and is below its historical average of 31.0% for the 27th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 1.8 percentage points to 39.3%. Bearish sentiment is above its historical average of 31.5% for the 31st consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 3.6 percentage points to –1.4%. The bull-bear spread is below its historical average of 6.5% for the eighth consecutive week.

This week’s special question asked AAII members which factor is most influencing their six-month outlook for stocks.

Here is how they responded:

• The economy and/or inflation: 37.5%

• Geopolitics: 28.6%

• Monetary policy/interest rates: 18.3%

• Valuations: 10.7%

• Other: 4.9%

This week’s Sentiment Survey results:

Bullish: 38.0%, down 1.8 points
Neutral: 22.7%, up 0.0 points
Bearish: 39.3%, up 1.8 points

Historical averages:

Bullish: 37.5%
Neutral: 31.0%
Bearish: 31.5%

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This week, we cover our strategy that focuses on firms passing the AAII Neff screen. Inspired by John Neff—who served as portfolio manager of the Vanguard Windsor Fund from 1964 until his retirement in 1995—the Neff value investing approach uses a stringent contrarian viewpoint. Neff perennially found undervalued, out-of-favor stocks in the bargain basement. He liked stocks with a combination of low price-earnings (P/E) ratios, solid forecasts in earnings and sales growth, and an increasing dividend yield. Neff searched for stocks that were unattractive and, in his words, matched the fund’s “cheapo” profile. Neff’s book, “John Neff on Investing” (Wiley, 2001), discusses these value investing principles. His book served as the primary source for the construction of our screen.

The Neff screen has shown strong long-term performance, with an average annual price gain of 14.7% since inception in 1998, versus the S&P 500 index’s 7.5% price gain over the same period.

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Primary Criteria Used for Screening

The Neff screen has three initial requirements that can be considered primary screening criteria:

• Low dividend-adjusted PEG ratio

• Low price-earnings ratio

• Solid estimated growth

Low Dividend-Adjusted PEG Ratio

With value investing, there are a number of ways to screen for attractively priced stocks. One way is via a combination of criteria that includes a low price-earnings ratio and a strong dividend yield, with support from solid estimated earnings and sales growth. Another method is to employ the hybrid multiple called the dividend-adjusted price-earnings-to-earnings-growth (PEG) ratio. With this second method, solid earnings growth and sales growth forecasts are still needed.

The dividend-adjusted PEG ratio serves as the foundation of the Neff screen, which was created using AAII’s Stock Investor Pro fundamental stock screening and research database.

The standard PEG ratio adjusted to reflect the dividend yield is referred to as the dividend-adjusted PEG ratio. It is calculated by dividing the price-earnings ratio by the sum of the estimated earnings growth rate and the dividend yield. The dividend-adjusted PEG ratio encompasses each of the key components of Neff’s value investing style—the price-earnings ratio, earnings growth estimates and the dividend yield.

AAII’s Neff screen looks for PEG ratios that are less than or equal to half of the median value for the entire database.

Low Price-Earnings Ratios

The cornerstone of any value investing approach is low price-earnings ratios. The difficulty with low price-earnings investing is separating the “good” stocks that are misunderstood by the market from the “bad” ones that are accurately pegged because of lackluster prospects. Many low price-earnings ratio stocks are banished to the bargain bins, not because they are bad investments with poor outlooks, but because their earnings and growth prospects do not excite investors, leaving them out of favor among the masses.

Separating the two involves a willingness to roll up your sleeves and dive into mounds of research, analyzing many different industries and reviewing individual company financial statements. Neff continually found and bagged low price-earnings multiple stocks primed for market upgrades.

Solid Estimated Growth

Low price-earnings ratios alone are not enough; adding solid earnings growth estimates to the equation offers validation that the company may not deserve its low ratio. Admitting that growth estimates are nothing more than educated guesstimates, Neff warns that investors must learn to visualize prospects for the company and its industry and look for confirmation or contradiction of the market’s view in the company’s fundamentals. The goal of analyzing growth forecasts, Neff argues, is to establish credible growth expectations.

Monitoring published earnings estimates and consensus estimates also enhances one’s clairvoyance. Neff refers to these consensus estimates as prevailing wisdom in its most literal form. In many cases, the market overreacts if a company’s reported earnings fall short of its consensus estimate, which is called a negative earnings surprise. In this instance, where strong fundamentals remain, buying opportunities present themselves to low price-earnings investors.

Concentrating on long-term, five-year estimates, Neff required strong growth forecasts, but not so strong that growth compromised risk. He therefore established a ceiling for any growth forecasts. AAII’s Neff screen requires an estimated earnings growth rate greater than or equal to 7% and less than or equal to 20%.

Secondary Screening Criteria

Neff also highlights a group of secondary principles that help support a low price-earnings strategy.

Sales Growth

In terms of important components in a value investing strategy, Neff considers sales growth just below that of estimated earnings growth. His argument is that growing sales, in turn, create growing earnings. Any measure of margin improvement can buttress a case for investing, but truly attractive stocks must be able to build on that by demonstrating formidable sales growth. Therefore, the same parameters for estimated earnings growth are applied for sales growth.

Dividend Yield

The results of a low price-earnings ratio strategy often include companies with high dividend yields. In seeking out low price-earnings ratio stocks, Neff also found that high dividend yields serve as price protection: If stock prices fall, a strong dividend yield can help heal many wounds. For that reason, Neff considers dividends a free “plus,” meaning that when you purchase a stock paying a dividend, you do not shell out a red cent for that dividend payment.

The Neff screen does not directly seek out dividend-paying companies, but it does consider the impact of the dividend yield in the valuation of the company.

Free Cash Flow

Another secondary component of Neff’s approach is free cash flow—cash left over after satisfying capital expenditures (capex). Neff searched for companies that would use this excess cash flow in ways that favor investors. Such firms could pay additional dividends, repurchase stock shares, fund acquisitions or simply reinvest the extra capital back into the firm.

AAII’s Neff screen looks for positive free cash flow for the trailing 12 months and the most recent fiscal year.

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Operating Margin

The last key ingredient in this dividend-adjusted PEG ratio screen is an operating margin better than current industry medians. Industry medians are used here as the benchmark because margins tend to be very industry-specific. For example, software vendors enjoy operating margins in excess of 40%, while supermarkets and grocery stores work on very thin margins. A robust operating margin shields a stock against any negative surprises.

AAII’s Neff screen requires operating margins greater than the industry median for both the trailing 12 months and the most recent fiscal year.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

In today’s market, do you think it’s smarter to go against the crowd and look for undervalued stocks or to follow popular stocks when their growth and fundamentals support the hype?

Click here and then choose the Join Community button on the right to answer this question or read their responses.

Contrarian, but Not Foolish

The arguments favoring value investing are most compelling amid the rage and clamor for hot stocks and hot industries, when investors are least likely to take heed and listen.

Nevertheless, Neff concedes that it is foolish to be different just to be different. It is fine to be contrarian and question the market’s herd mentality, but Neff warns investors not to become so naive that your stubborn nature consumes you and forces bad decisions. If, upon further review, the herd is right about a certain growth stock opportunity, concessions toward your hardened style must be made.

Measured Market Participation

Neff developed a plan called measured participation that helped the Windsor Fund stay clear of old practices like conventional industry representation. This idea allowed the fund to focus on fresh ideas in portfolio management and promoted thinking outside the box when it came to diversification. With measured participation, four broad investment categories were established: highly recognized growth, less-recognized growth, moderate growth and cyclical growth.

Neff suggests that investors concentrate research efforts in the less-recognized and moderately recognized growth areas, where earnings growth is comparable to that posted by the big growers, but where lack of size and visibility tends to hold many back. Among moderately recognized growth stocks, usually in mature industries, solid investment citizens reside. Moderate growth stocks tend to hold fast to prices during difficult markets, thanks in part to nice dividend yields.

Neff concedes that cyclical growth stocks are somewhat tricky and that timing is everything. The trick is to anticipate increases in demand using your knowledge of the different industries. For example, the apparel, footwear and jewelry industries are obvious consumer cyclicals. Capital goods producers are also cyclical picks, as well as homebuilders and various construction service contractors.

Conclusion

While the Neff screen attempts to capture the principles set forth by Neff in his book, it is only a starting point, not a recommended list of companies.

Before making any investment decision, you should gather all pertinent information and understand the investment thoroughly. Also, keep in mind that no one investing technique will be best in all market environments and that the techniques that worked in the past may not necessarily prove to be as useful in the future.

Top 15 Companies Passing the Neff Screen (Ranked by Dividend-Adjusted PEG Ratio)

Investors interested in the Neff strategy might also be interested in AAII’s Stock Superstars Report (SSR), where the Neff approach is one of four guru strategies used to build and manage a model stock portfolio.

Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

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Charles Rotblut leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

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• Understand why combining low valuations with strong price performance has historically generated returns that exceeded those of major market indexes

• Discover the benefits, risks and volatility of investing in micro-cap stocks, plus the importance of portfolio diversification and due diligence
  
  

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