Spot Value in Rough Markets With the Templeton Screen

This week, we highlight the stock screening strategy inspired by legendary value investor Sir John Templeton and provide a list of stocks that currently pass a screen based on his approach.

Templeton applied Benjamin Graham’s value investing principles on a global scale, seeking undervalued companies with strong fundamentals — often during times of market volatility. The AAII Templeton screen is built around these ideas. As of March 31, 2025, the AAII Templeton screen has gained 9.0% since inception in 1998, while the S&P 500 index has gained 6.7% over the same period.

The Templeton approach tends to view volatility as an investor’s best ally in the search for bargains to purchase. According to “Investing the Templeton Way” by Lauren C. Templeton and Scott Phillips (McGraw-Hill, 2008), Templeton believed that volatility presents opportunities, and the greater the volatility, the greater the opportunities to locate a bargain. With volatility taking a front seat in the current market, following the Templeton way may be a good method to find some bargains.

Templeton became a successful investment adviser after studying under Graham, who is often referred to as the father of value investing. Templeton quickly identified with the philosophy of contrarian investing and continued to train in the art of value investing. In his work, Templeton applied Graham’s ideas to new situations, showing how well value investing could work for international stocks, including those in emerging markets.

Templeton was given the moniker “the Christopher Columbus of investing” because of his ability to discover new worlds of investing. He was one of the first U.S. money managers to invest internationally, finding value in global markets and among emerging nations. An ardent contrarian and value investor, his focus was always on domestic issues, but the scope of his searches was not limited to U.S. market boundaries. Sometimes bargains were found in Japan, other times Argentina. It did not matter.

Value investing concentrates on unappreciated stocks trading at attractive prices — bargain stocks. Templeton was always hunting for bargains and looking for the best-priced stocks. His philosophy was to buy out-of-favor companies that were beginning to show signs of reawakening — regardless of the country of origin.

As a fund manager, Templeton pioneered the use of globally diversified mutual funds. His Templeton Growth Fund was among the first to invest in Japan in the middle of the 1960s, China in the late 1980s and South Korea after the Asian financial crisis.

Two books served as the basis for the creation of the AAII Templeton stock screening approach. Both books feature sections devoted to Templeton’s life and investing beliefs: “Lessons From the Legends of Wall Street” by Nikki Ross (Dearborn Financial Publishing, 2000) and “Money Masters of Our Time” by John Train (HarperCollins Publishers, 2003).

Core Concepts

When implementing a value investing strategy, there are a number of factors to consider. The AAII Templeton screen uses low price-earnings (P/E) ratios as the foundation. One difficulty in implementing a low price-earnings ratio approach is separating the “good” companies — those that are simply misunderstood by the market — from the ones that the market has accurately pegged as being “losers.” Many low price-earnings ratio stocks are in the bargain basement because their industry, products, or earnings and growth prospects do not excite investors.

Separating the good firms requires some additional, supportive filtering factors. For Templeton, such support and confirmation came from what he called future probable earnings, or forecasted earnings growth. From Templeton’s viewpoint, for any stock selection to be considered worthy, future probable earnings need to be strongly favorable.

Identifying Attractive Stocks

Templeton liked to compare current price-earnings ratios to five-year average annual price-earnings figures when looking for the lowest multiple stocks. There are two hidden aspects of this screening criterion: Not only does it require the current price-earnings ratio of the stock to be lower than its five-year average, but also any passing company must have been traded for at least five years and had positive annual earnings per share for each of the last five fiscal years.

When screening against five-year averages, useless numbers can sometimes slip through the cracks in a screening technique. Beyond negative earnings, which lead to meaningless price-earnings ratios, unusually low earnings may also throw off standard price-earnings ratio screens. Short-term drops in earnings due to extraordinary events may lead to unusually high price-earnings ratios. As long as the market interprets the earnings decrease as temporary, the high price-earnings ratio will be supported.

Because the average price-earnings ratio model relies on a normal situation, these “outlier” price-earnings ratios must be excluded.

To eliminate companies with these extreme price-earnings ratios, an additional filter is applied in the AAII Templeton screen that excludes any stocks with ratios of 75 or above for any of the last five fiscal years.

Templeton believed that the income statement should show consistent earnings growth as well. Earnings per share growth is one of the primary benchmarks used to measure company performance. The Templeton-inspired screen looks for stocks with positive earnings growth over the last 12 months and over the last five years. Beyond an overall growth figure, investors should look at the year-to-year trends since long-term growth rates can easily mask the variability and risk of the underlying figures.

Examining the expected five-year growth estimate captures Templeton’s future probable earnings prerequisite. His desire for consistent growth in the future is portrayed by a positive earnings growth estimate filter.

Templeton also sought companies with competitive advantages. This can be detected by comparing a stock’s forecasted earnings growth figures to the forecasted growth of its industry; firms with earnings growth estimates greater than or equal to the industry median more than likely have a competitive advantage.

Operating margins can also reveal a competitive advantage. The operating margin paints a picture of how efficiently the company’s management is operating within the framework of the company’s costs. Our screen requires the recent trailing 12-month and current-year operating margins to be greater than or equal to industry medians for their respective periods. Industry medians are particularly important in this area as benchmarks because operating margins tend to be very industry specific.

Templeton also compared current operating margins to previous margins. An additional filter requires the current operating margin to be greater than the five-year historical average operating margin.

Templeton monitored the balance sheet, looking for companies showing good financial strength. Templeton believed a strong financial position enables any company to work through the difficult periods often experienced by overlooked, out-of-favor stocks. Acceptable levels of debt vary from industry to industry. For that reason, the last criterion screens for companies with total liabilities relative to assets in the current quarter that are below their industry norms. This particular ratio is used here because it considers both short- and long-term liabilities.

Qualitative Factors

In addition to researching company reports, pouring over financial statements and analyzing each stock’s industry, Templeton also placed a great deal of importance on several qualitative factors: quality products, sound cost controls and the intelligent use of earnings by management in order to grow the firm.

Templeton also looked for any potential catalyst that might change the perception of a stock and spark interest among stargazing investors, which, in turn, would cause the stock’s price to rise. Catalyst-type events include the creation of new markets and products and could also extend to announced potential mergers and acquisitions (M&A), as well as favorable changes within the company’s industry.

Performance

The table below shows that the Templeton approach has outperformed the S&P 500 over the past three and five years but, like most value strategies, it has lagged the market over the past 10 years. Since 1998 when tracking of the screen started, it has gained more than the market.

Conclusion

Templeton’s idea behind bargain hunting is not to be an unblinking contrarian but rather to be a wise buyer of out-of-favor stocks. By finding stocks with price-earnings ratios lower than historical averages and companies with strong and improving earnings growth rates, you may follow the Templeton way and “buy when there’s blood in the streets.”

It may also be helpful to remember his advice: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Stocks Passing the Templeton Screen (Ranked by P/E Ratio)

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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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