Mark Slater fancies these fast-growing small caps.
Some say successful stock picking boils down to luck. But going on the performance of one top fund manager in 2010, it might come down to genetics!
Okay, so I don't really think Mark 'Son of Jim' Slater's recent stellar run settles the nature versus nurture versus nothing-but-chance debate.
Slater surely benefited as much from wisdom passed on by his legendarily share-obsessed father as much as he did from whatever genes confer an advantage in hunting for cheap shares. And anyway, 12 months does not a legend make -- even 12 months over which you post a 77% return like the Slater Growth Fund clocked up in 2010.
But one thing is indisputable: Jim Slater's Zulu method of finding profitable small caps has been working its magic again in his son's hands. On the off-chance that it will keep delivering, here are three shares that have helped his super returns, and some thoughts on their current valuation.
Oxford Instruments
Originally spun-out from Oxford University and listed in London in 1983, Oxford Instruments (LSE: OXIG) makes equipment that sound like its hails from the workshop of James Bond's Q.
Need a cryogenic system? Some superconducting wire, perchance? The company's 1,250 employees are already on it.
As for the customers, they're distributed all around the world, with 25% of revenues coming from the US, and healthy sales in Europe and Asia, too. Sales in China have doubled year-on-year.
After a decade of going nowhere much, Oxford Instruments' have put on a spectacular spurt of late, with the shares up 172% in the past 12 months. Yet it seems truer to say the shares were very cheap in early 2009 than that they are insanely expensive now.
In its interim management statement of 19 January, the company reported:
The good performance that was seen in the first half of the year has continued into the quarter ending December. Year to date orders, sales and profits for the Group are all as anticipated, and well ahead of the same period last year.
In his December update to his investors, Mark Slater said he expected organic sales growth in excess of 10% per annum from Oxford Instruments, supplemented by acquisitions. Believing there's scope for better margins, too, Slater anticipates at least 15% earnings growth per annum.
Analysts are looking for earnings of a little over 35p for the current year to March 2011, rising to just under 40p for 2012, making for P/Es of 19 and about 16.5 respectively. This put the shares are on a PEG ratio of 1.1, which isn't bargain basement, although it's hardly dear, either, given Oxford Instruments is well out of micro-cap range with a market cap of £325 million.
The company certainly seems to be riding the rebounding global economy very well. After the near vertical take-off in its share price in recent weeks, however, anyone would be excused for waiting for some sort of pullback. Just be aware that investors in these sorts of companies have waited in vain for buying opportunities recently.
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Andor Technology
Andor Technology (LSE: AND) is another academic spin-off, this time from Belfast University.
Andor supplies extremely high-end digital cameras and other imaging gizmos, and judging from the preliminary 2010 results it released in December, that's a good business to be in. Turnover rose 29% in the year, while adjusted operating profits leapt 50%.
According to its chairman, a strategy rethink has delivered a 419% increase in operating profit over the past three years. This sort of growth is music to a Zulu investors' ears, especially when the company also has net cash of £7 million, and can substantially fund acquisitions out of cashflow.
Andor Technology said it entered 2011 with a record order book -- up 52% on the prior year. According to Slater Senior's Company Refs service, the shares are on a heady P/E of nearly 23, but strong expectations of basic earnings per share growth means the PEG ratio is still attractive at 0.9.
One downside for many private investors though will be the lack of even a token dividend.
Judges Scientific
Like Oxford Instruments, AIM-listed Judges Scientific (LSE: JDG) designs and manufactures equipment for the laboratory. But it's a far smaller concern. Judges' market cap is a tiddly £18 million -- one eighteenth that of its Oxford-spawned rival.
So is Judges going to be the next bigger thing? It's certainly growing like the clappers -- turnover increased from £2.2 million in 2006 to over £11 million by 2009, with adjusted earnings per share up more than five-fold to 28p. At the halfway stage for 2010, the company had already booked 22.5p for the year on record sales, and a trading statement of 20 January 2011 ahead of full-year results said this momentum has continued in the subsequent six months, with earnings likely to be 'above market expectations'.
The high-end of analysts' estimates for earnings in 2010 -- around 41p per share -- looks well in range. With the shares at 413p, a trailing P/E of 10 seems cheap.
The company was carrying £1.2 million of debt at the halfway stage -- however, it had shelled out £1 million for a new acquisition in the period, and it has plenty of cash on hand. And while the 7.5p dividend -- equivalent to a 1.9% dividend yield -- is low, it can be expected to keep rising fast. The payout was just 1p per share when introduced in five years ago.
Note that all three companies operate in the same general space, and they are all benefiting from weakness in the pound compared the mid-part of the decade, so don't put all your shares in one basket.
As of his latest update in December, Slater's biggest holding was in Andor Technology, which represented a little over 6% of his portfolio. Neither of the other two holdings was big enough to be noted in his 10 largest investments.
More from Owain Bennallack:
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