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DIY Investor Magazine
/
September 2016
Even if you’d come late to the party, ASOS’s peak of
over £70 per share at the start of January 2014 would
have represented a five-year gain of over 1,700%.
That is not the kind of gain you will ever see from a
big company because they are already well established
in the market and can’t multiply their profits quickly; but
small companies can – and do – multiply profits at a
rapid pace all the time. Also, most leading brokers don’t
fully research smaller stocks so there are more likely
to be bargains in this relatively unexploited area of the
stock market - as an AIM listed stock, ASOS also gains
from considerable IHT benefits too.
This doesn’t mean the Slater principles won’t work with
large cap stocks either. Back at the Telegraph in 2014,
Jim recommended ITV which at the time was quoted at
203p. By August 2015, it was up to 280p - a 38% gain
in less than 10 months. Income or growth, whatever
investors’ approach to investment they usually begin
the search for attractive shares with their preferred key
criteria, and then look for other supporting factors. So
what are the principles of Jim Slater’s market-beating
stock selection formula?
1
A positive growth rate in earnings per share in
at least four of the last five years Slater looked for
steady growth of at least 15% per annum; a shorter
record can be acceptable if there has been a recent
sharp acceleration in earnings growth.
2
A low price to earnings ratio relative to the growth
rate He warns investors not to pay excessively for
future earnings; he liked companies with a PEG ratio
below 1 and describes the PEG ratio - which divides
the PE ratio by the earnings growth rate - as a useful
metric for ‘measuring the value you get for your
money’.
3
The Chairman’s statement must be optimistic
Slater warned that ‘if the chairman is pessimistic,
earnings growth could be at an end’.
4
Strong liquidity, low borrowings and high cash
flow For Jim Slater, strong cash flow was an
essential indicator of a promising stock. He wanted
to see EPS converted into cash year after year and
to see it translating into strong cash balances or, at
the very least, rapidly reducing gearing. Cash flow
per share for the last reported year should exceed
EPS. Sometimes a compromise can be made if there
is a good reason (e.g. very rapidly increasing
sales with a consequent increase in working capital).
However, if the last reported one-year figure is
adverse, the average cash flow per share for the
previous five years must substantially exceed EPS for
that period.
5
Competitive advantage He found the shares he
believed he should invest in by starting out with
the whole universe of quoted shares and applying
a series of sieves like low PEGs, strong cash flow
and high relative strength. He would then examine
the shares that found their way through the sieves
and try to identify the competitive advantage that
they must be enjoying to possess such outstanding
financial characteristics; he identified the many
different types of competitive advantage that can
be the source of a company’s winning formula.
High ROCE and good operating margins are usually
strong supportive evidence of a company’s
competitive advantage.
6
Something new – such as a new product or move
into a new market A change of CEO, new products
or a major acquisition can have a significant effect
on future EPS and can often be the trigger for a
reappraisal of a company’s PER.
7
A small capitalisation Slater wrote that investors
should target companies smaller than £100 million,
which was increased to £250 million when he wrote
Beyond the Zulu Principle in 1996 – equivalent to
£430m today.
