We find just three UK shares that meet Martin Zweig's criteria.
Following my recent Investment Greats article on Marty Zweig, a request came flooding in asking what shares Zweig might buy on the London market, based on his buying criteria.
And it was probably the most difficult filter I've done, as none of the share databases seem to give me the information that I want, but after some playing around I came up with some possibles.
What does Zweig look for?
The main thing that distinguishes Zweig from other GARP (growth at a reasonable price) investors is the fact that he is searching not just for companies where earnings are increasing, but for those where earnings are accelerating.
The price/earnings ratio (P/E) should be above 5. It should also be below the lower of 43 and three times the market P/E; the FTSE All-Share is on a multiple of 17.6, so three times that would be 53. Considering that he was referring to the American market, it could be argued that in Britain we should set this maximum somewhat lower than 43, but let's leave it at 43 for this exercise.
We also need to find shares that have outperformed the market, so that they already have the wind of investor sentiment behind them. I've taken a period of six months for this, which almost perfectly captures the recent rally.
Sales should be growing at a similar rate to earnings. Earnings growing faster than sales could be considered a good thing, as stripping out costs is always desirable, but the problem is that cost savings lead to one-off increases in growth rates, which are not repeatable. And sales growing faster than profits shows an erosion of margins, which is also less than ideal.
Debt should be below the average for the company's sector, and the shares should be easily traded, which rules out smaller companies.
In short, these are not easy criteria on which to filter.
So what did I find?
And if I apply all these criteria we get exactly no shares. Zero. And I counted them twice just to be sure.
Focusing only on the major criteria -- accelerating earnings, P/E, and outperformance -- I was able to find just three shares with the required characteristics:
| | Price
(p) | Mkt Cap
(£m) | P/E | Growth
2 yrs ago | Growth
last yr | Growth
this yr
(est) | 6 month
relative
strength |
|---|
Healthcare
Locums | 259 | 270 | 10.0 | 27% | 30% | 82% | 52% |
Immunodiagnostic
Systems | 415 | 110 | 13.7 | 23% | 30% | 39% | 77% |
| Sage Group | 229 | 2,998 | 13.4 | 1% | 9% | 30% | 4% |
Data Sources: Company REFS, Sharelockholmes
This is a bit disappointing, and due to the difficulty of sifting the data there is the possibility that I've missed something. Ideally Zweig's is a 'shotgun' approach, identifying a reasonable number of companies that as a group should be expected to outperform, even though some individual shares won't. A selection of three shares doesn't really work in that context, but perhaps that says something about the current state of the market.
According to his theory, it's all about the numbers, and unlike Warren Buffett or Peter Lynch, Zweig doesn't really care what the company actually does: "If a company can show nice consistent earnings, I don't care if it makes broomsticks or computer parts."
Being a curious bunch (and I mean that in the nicest possible way), many Fools will have a different opinion about the need to understand their companies. And as always The Fool is a valuable source of information for those who want to know more:
- Healthcare Locums (LSE: HLO) is up nicely since David Kuo highlighted it back in June, and AliceInWonder attended the AGM a couple of weeks later. It's also been reviewed on our discussion boards;
- Immunodiagnostic Systems (LSE: IDH): AliceInWonder also attended this company's AGM in August, while Alan Oscroft has also been looking into it recently; and
- Sage Group (LSE: SGE) popped up on my Neff filter in July, and was reviewed in May by Malcolm Wheatley.
More from Padraig O'Hannelly:
