Investing strategies that target so-called ‘growth’ companies have emerged this summer as some of the best performers of all the approaches we track at Stockopedia. And despite August being a usually quiet month for the market, the recent share price movements of a handful of companies have driven some of these growth strategies even further.
Last month we gave a nod to GARP strategies – or Growth At a Reasonable Price – as some of the best performing GuruModel screens during the mid-year. After several months in which value and price momentum had produced the best returns, attention was clearly beginning to switch to strategies that focus on keenly priced stocks offering earnings growth and improving margins. In conditions where value opportunities are thin on the ground, investors willing to raise their standards and pay a bit more for shares with strong growth characteristics, GARP investing is looking like an effective tactic.
Perhaps the most famous of these strategies to have recently found a sweet spot in the investing cycle is Jim Slater’s Zulu Principle. Jim Slater’s 1990’s book of the same name explained how to pick potential winners by selecting stocks that are undervalued relative to their growth rate. He illustrated a shorthand to this process whereby investors could hunt for stocks with a PEG ratio (or Price Earnings to Growth ratio) of less than one. Stockopedia’s implementation of this strategy has produced a 3-month return of 21.5% against the FTSE 100, which has fallen by 5.2% over the same period. It has picked up companies including Brammer (LON:BRAM), the manufacturing components supplier, which has seen its share price jump by 40% to 455.9p since the beginning of July when it reported that its growth initiatives were bearing fruit.
Elsewhere, the current Zulu portfolio also includes stockbroking firm Jarvis Securities (LON:JIM), where the shares have risen by 39% to 400p over two months following its best ever set of half-year results. Interestingly, the shares saw a pronounced rise in early August, coinciding with rule changes that now allow AIM-quoted stocks like Jarvis to be acquired using a tax-efficient ISA wrapper. More generally, that change has had a positive early impact on AIM, which after a lacklustre year has actually gone on to outpace the otherwise impressive performance of the FTSE Smallcap index during August.
Investors looking for a starting point in assembling a GARP investing screen perhaps need look no further than our pure GARP strategy. The criteria here look for a medium-term track record of earnings growth, robust return on capital, improving margins as well as price strength and a reasonable valuation versus the sector. With a stunning 3-month return of 26.8%, this portfolio has soared recently with the help of a few stellar share price performances (see chart below). Among them has been STV (LON:STVG), the Scottish TV production and broadcasting group, which has seen its shares rise by 53% to 209.7p since early July. Half-year results that offered an upbeat assessment of its growth prospects, lower debt and a resumption of dividends, proved to be the catalyst.
Meanwhile, the GARP strategy also benefitted from two, albeit rejected, takeover approaches for oilfield engineering services company Kentz (LON:KENZ), which helped to drive up its share price by 51.2% to 567p. Prior to those bid announcements Kentz was already a share showing up on several GuruModel strategies and had been brought in to the Stockopedia Screen of Screens portfolio when it was rebalanced in June. It’s now the best performing stock in the SoS portfolio (itself up by 9.7% over 3 months), which comprises shares that qualify for at least three other GuruModel screens.
Among the other GARP models putting in strong performances over the past three months is the Robbie Burns-inspired Naked Trader-esque (up 11.2%) and Martin Zweig Growth (up 7.7%). Even the Peter Lynch growth screen, which has been dogged by underperformance and limited qualifying stock candidates this year, has leapt recently (up 14%), although largely as a result of Kentz being in the portfolio.
Growth strategies shine
Overall, the big news for growth strategies during the summer has been the price performances of a handful of shares that have added some sparkle to what were already emerging as effective strategies in the current conditions. But while events at the likes of Kentz and STV have obviously flattered recent returns, it’s clear that GARP stocks could be worth a closer look – with the Naked Trader-esque portfolio being a useful illustration. Of the 21 stocks in that portfolio, all but three of them have made positive gains over the past three months and 12 of them are in double figures!
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Filed Under: Growth Investing,