Buy Low, Sell High With Sir John Templeton

Buy Low, Sell High With Sir John Templeton

Thursday, June 19, 2008 4:22 PM

By: Michael Carr


Always on the hunt for the next great investor, Forbes magazine recently profiled Randolph McDuff, a virtually unknown online trader in Canada who has delivered gains of 32.2 percent a year for the past eight years.


That's almost three times more than Warren Buffett’s Berkshire Hathaway over the same time frame.


Like Buffett, McDuff is a value investor. But lacking Buffett’s ability to consistently find big winners, McDuff has adopted instead the style of Sir John Templeton. He seeks to identify a list of relatively inexpensive stocks.


Templeton, now 96, has been an investment superstar for more than six decades. He made his first investment gains by buying 100 shares of every stock selling for less than $1 a share at the beginning of World War II.


By the time the war ended, almost a third of the companies he had bought into were bankrupt. But his overall investment had returned more than 200 percent.


From there, Templeton went on to found one of the largest mutual fund companies in the world. Eventually he sold Templeton Funds to Franklin Resources, although he is still an active investor.


Known as a global investor, Templeton applies simple concepts to identify potential stock market winners. These factors were used to develop this Templeton value screen:


• P/E ratio less than the five year average P/E ratio for the stock and below the average ratio of all companies in the same industry.


• Earnings per share growing each year for the last five years and projected to increase in the current year. Additionally, the company needs to have forecasted earnings growth greater than the industry average.


• Operating profit margins better than industry average and showing steady improvement over the past five years. Operating margin is the ratio of operating income to sales. This is Templeton’s preferred measure of management quality. When a company's margin is increasing, it is earning more for each dollar of sales.


• Less debt than the industry average demonstrates to Templeton that the company is conservatively managed and likely to make money even in downturns. This is an important criterion for an investor who learned his craft during the Great Depression.

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