An introduction to a UK value-growth master.
All this week, I've been introducing you to some of the world's great investors, looking at their individual approaches, and running stock screens to unearth examples of the type of companies their different styles produce.
We've looked at value pioneer Ben Graham, growth guru Phil Fisher, living legend Warren Buffett, and "Mr Ten-bagger" Peter Lynch.
Today, we finish the series with Jim Slater, a veteran UK investor, who has described his approach as "buying growth shares using value filters to provide a margin of safety".
Readings REFS
Slater not only detailed his investment approach in his book The Zulu Principle, published in 1992 -- updated in Beyond the Zulu Principle (1996) -- but also devised Company REFS (Really Essential Financial Statistics), a service to help investors identify suitable investment opportunities.
Slater wanted to invest in growth companies, but he also wanted some insurance -- a "margin of safety". He sought this insurance in filters that could, on one hand, confirm the quality of a company's earnings and, on the other, prevent him paying too much for it.
Slater famously said that "elephants don't gallop", and he looked to smaller companies for growth. Not just any growth, but consistent growth. He required four years of earnings per share (eps) growth -- which could include forecasts -- or five years in the case of highly cyclical companies, such as house builders.
As a measure of the quality of earnings -- in particular as a guard against creative accounting -- he required a cash-flow-per-share-to-EPS ratio of 1+, and also liked to see at least a small dividend.
The filters Slater used to ensure he didn't pay too much for his growth were the price-to-earnings (P/E) ratio and -- a measure that has become synonymous with his style -- the P/E-to-growth (PEG) ratio. He required a P/E of less than 20 (eliminating very highly rated growth companies) and a PEG of less than 0.75 (he considered a PEG of 1+ to be too expensive).
In theory, shares with a low PEG that deliver their forecast earnings growth should, sooner or later, enjoy an upward P/E re-rating, significantly compounding the share price appreciation that might be expected from the earnings growth alone. Slater gives an illustration:
"Take for example a company which had a share price of 120p, EPS of 10p, and a prospective growth rate of 20%. It therefore had a P/E of 12 and a PEG of 0.6. If, after a year, EPS rose to 12p as expected, and the P/E was re-rated to 18, the share price would increase to 216p. In that event, the resultant capital gain would be 96p, of which 75% would be due to the re-rating of the P/E, and only 25% to the increase in EPS."
Slater incorporated a filter of one-year relative share price strength into his screen, on the grounds that it indicated the market "is already beginning to appreciate the virtues of the company, so the wait for the re-rating should not be unduly long".
Astute readers will have noticed that there are some similarities between Slater's approach and that of Peter Lynch, who we looked at yesterday. In particular, the really keen-eyed among you will have spotted that Slater's PEG is the inverse of the 'Lynch ratio', although without the dividend yield Lynch factored in.
There are differences as well, of course, not only in quantitative measures -- such as Slater's positive one-year relative share price strength -- but also in myriad subjective qualitative judgments that make successful investment as much an art as a science.
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A Slater screen
One of the features of Slater's approach and the REFS database is the conversion of all analyst forecasts into rolling 12-months-ahead figures. This synchronising of companies' uneven fiscal year ends, enabling a like-for-like comparison of their financial statistics, is something I've still yet to see among other data providers.
I ran a Slater screen on REFS with the following filters:
- Market capitalisation of less than £500m (elephants don't gallop).
- PEG less than 0.75.
- P/E less than 20.
- EPS growth greater than 15%.
- Dividend yield greater than 1%.
- Cash flow per share/eps greater than one.
- One-year relative strength greater than zero.
All the companies in the table below passed the screen but, for manageability, I haven't detailed the numbers of the last three criteria.
| Company | Market cap (£m) | Share price | PEG | P/E | eps growth (%) |
|---|
| First Derivatives (LSE: FDP) | 80 | 478p | 0.5 | 10.0 | 22.1 |
| Hargreaves Services (LSE: HSP) | 322 | 1,190p | 0.3 | 7.8 | 27.9 |
| IDOX (LSE: IDOX) | 114 | 33p | 0.4 | 11.6 | 31.4 |
| IS Solutions (LSE: ISL) | 10 | 41p | 0.5 | 10.4 | 20.3 |
| Jarvis Securities (LSE: JIM) | 19 | 181p | 0.6 | 10.0 | 15.7 |
| Maintel (LSE: MAI) | 41 | 388p | 0.3 | 10.8 | 39.3 |
| Pan African Resources (LSE: PAF) | 217 | 15p | 0.2 | 5.5 | 28.5 |
| SpaceandPeople (LSE: SAL) | 13 | 65p | 0.4 | 7.8 | 20.7 |
| Tikit (LSE: TIK) | 48 | 324p | 0.4 | 12.1 | 30.8 |
| Walker Greenbank (LSE: WGB) | 42 | 73p | 0.4 | 7.9 | 20.5 |
Interestingly, three companies overlap with yesterday's Peter Lynch screen: First Derivatives, Hargreaves Services and IS Solutions.
The stock market code of Jarvis Securities might attract Mr Slater's eye, but whether this company or any of the others in the table are actually on his shopping list is another matter. As I've said before, a screener is only a starting point for further investigation.
Foolish bottom line
Five highly successful investors. Five different approaches to investing in shares.
No one style is "the best". Instead, different approaches suit different people, and it can take some time to discover the style that most suits you.
Whether you're just starting out, or have already been investing for some time, I hope this mini-series has given you food for thought.
For help trying to grow and preserve your wealth, start your 30-day free trial to Motley Fool Share Advisor today. You'll receive immediate access to what we believe are the best shares you can buy right now, complete with our in-depth analysis and ongoing coverage.
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> G A Chester does not own shares in any of the companies mentioned in this article.
