How to pick stocks the John Templeton way

A student of Benjamin Graham, Sir John Templeton was one of the most successful investors of the 20th century and unarguably, the best contrarian investor and a true bargain hunter. Templeton began his investing career during the Second World War in 1939. Although the economy was full of pessimism during that time, he executed his first trade. He took a loan of $10,000 and bought 100 shares of companies whose stocks were trading for less than $1. His rationale behind this was that these stocks were significantly undervalued due to political unrest. He did not expect all the stocks to do well. So, he took positions in a large number of stocks (104). He knew that some of them might go bankrupt. Finally, only four of these companies gave extraordinary returns. However, his portfolio was up fourfold to $40,000 in the next five years.

In 1954, Templeton ventured into the mutual fund market and launched Templeton Growth Fund, which delivered 15 per cent per annum over the next 38 years. It was sold to Franklin Resources in 1992. Apart from the US market, he forayed into the international markets, which was quite uncommon during that time. His investment philosophy focuses on constantly searching for the markets that are depressed and looking for quality stocks that are beaten down and overlooked by investors. He focused on buying substantially undervalued stocks and holding them till their price rose to fair value. John Templeton held his stocks with an average period of four years. This was the secret of the outstanding track record of his investment career.

Methodology:
To arrive at John Templeton type of companies, we used the following quantitative filters:

• Trailing 12-month (TTM) EPS greater than financial-year EPS and previous year TTM EPS
• Sequential growth in 5Y EPS
• Annualised 5Y EPS growth greater than 0
• TTM and financial-year operating margin greater than 0
• TTM and 5Y financial-year operating margin greater than the industry median
• Debt to assets less than the industry median
• Current P/E less than the 5Y median
• 5Y median P/E less than 75

Using the above-mentioned filters, we have created a list of companies:

John Templeton's investment techniques, such as 'avoiding the herd' and 'buy when there's blood in the streets', are still relevant. Investors who remained optimistic during the pandemic-induced turmoil in the markets are the ones who made the maximum profits. Sir John Templeton was known for booking profits when there were very high expectations in the markets. According to him, panic and bear markets are a great source of excess returns, which we have experienced recently.

Also in the series:

How to pick stocks the Buffett and Munger way

How to pick stocks the Benjamin Graham way

How to pick stocks the Joel Greenblatt way

How to pick stocks the John Neff way