Jim Slater shares his latest views on asset allocation, investing criteria, gold and oil at the Growth Company Investor Show

Thursday, Sep 30 2010 by
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Jim Slater
Jim Slater

Jim Slater’s Zulu Principle books were some of the first books I read about investing before I joined the City as a young broker and so it was with great pleasure that I listened closely to his views on the market at the very enjoyable Growth Company Investor Show yesterday afternoon at the Barbican.

The background on Slater, if you don’t know his story, is very colourful.  He was a corporate raider building up Slater Walker through the 60's and early '70s in swashbuckling style and setting the mould for Jimmy Goldsmith who replaced him when it all went a bit wrong - the Bank of England having to step in to prevent it's collapse during a banking crisis.  He reinvented himself as a successful  children’s author, broadsheet columnist and highly successful investing guru publishing the Zulu Principle and founding Company REFS. 

He has further built his fortune by practicing what he preaches through growth company investing and latterly investing in resources.

What follows are my notes from his presentation:

 

Outlook & Asset Allocation

He foresees 2 contrasting possiblities in terms of the economy and macro environment:

  1. In the Dark Room -  This scenario involves deleveraging of banks, overcapacity, banks not lending, underfunded pensions, sovereign debt in doubt, US states in deficit, bleak deflationary output, US on point of no return - all pretty grim stuff really.
  2. In the Light Room (or the Quantitative Easing room!) - He likens it to being a heroin addict. You can't take the patient off the drug.  The Bank of England and the Federal Reserve are talking of more Quantitative Easing.  It makes cash a terrible investment but leads to potentially hyperinflation.

So, based on that, his preferred asset allocation is to hedge your bets and prepare for either or both scenarios at the same time: 

  • 25% in Cash,  
  • 30% in small cap growth shares, 
  • 30% in gold shares, 
  • 5-10% in oil, 
  • 5-10% in agriculture.

Growth Shares

Slater still insists that you should pick under researched niche small cap shares where reratings and takeovers are more likely.  He gave the statistic that the average micro cap share has beaten the market by 10 to 1 since 1940. 

Zulu Principle Criteria

Obviously he still bangs the table about the Zulu Principle System that he is renowned for and advocates his Company REFS product.  'It's all about the method'. In summary, he screens for the following:

  • Low p/e, 
  • Good eps growth, 
  • PEG < 1 (price earnings to growth ratio)
  • Cash-flow generation greater than profits, 
  • Low gearing
  • High relative strength, 
  • Not many director sales.

He mentions that the market is getting quite high, so the following stocks he qualifies as in general ‘holds’ rather than outright buys, but all he found on his Zulu criteria.

  • Andor Technology (LON:AND) - Results today and beating forecasts, but a bit expensive.
  • Volex Group (LON:VLX) - He sees this as a better bargain.
  • Cape Plc (LON:CIU) - It has quite a lot of debt, but lots of cash-flow. Asbestos problem ring fenced, and going to the full list - seemingly a very good buy at this level.
  • Advanced Medical Solutions Group (LON:AMS) - Well managed, breaking into America. He thinks it looks very good.

His son Mark Slater’s fund is run based on the PEG principle. Called the MFM Slater Growth Trust, it’s gained 75% in the last year so the criteria clearly have something going for them.  It is currently ranked number 1 out of 2795 Trusts.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

Gold Shares

Regarding gold, he says that still nobody likes it. In his view, the Financial Times and the Economist have been terrible on gold, applauding Brown’s sale at the bottom and still being sceptical.  They say it has no intrinsic value but you could say that about the dollar, works of art and many other assets. The Gold also isn’t the dollar, it’s not a doubtful debt, it’s absolute and a historic store of value.  For 2500 years, its been a currency and it’s embedded in the human psyche in a way that fiat currencies never have been.  It’s getting hard to find, Slater is mining 40,000 tonnes per day and only finding half a gram per tonne.  Gold also goes up in times of fiscal uncertainty - which is exactly what we have now. He much prefers gold shares to gold itself as you get the leverage. If the gold price goes from $1300 to $1700 and your fixed mining cost is $900 you make twice the profit.

Slater says the potential upside for Gold Companies comes from more sources than growth shares which only normally get revalued due to takeover, growth or re-rating. Gold shares get the leverage from the gold price with an enormous effect on the bottom line; increasing production creates a double effect, increasing top and bottom line but also reducing the unit cost; and prospective deposits mean gold companies are very likely to find more.

Gold Share Investing Criteria

Similarly to his growth stock criteria he has different criteria for gold shares... he requires:

  • A safe political territory (i.e. not Venezuela and not Russia)
  • Strong resource base, 
  • No serious environmental problems, 
  • Experienced CEO, 
  • Strong balance sheet, 
  • No hedging, 
  • Strong cash flow and PCF below average of peer group, 
  • Increasing production, 
  • Long life time, 
  • Cost per ounce of produced no more than $900, 
  • Very prospective resource,
  • Cost per ounce of gold in the ground to be as low as possible. e.g. GoldCorp took over Andean Resources and paid $773 per ounce for gold in the ground. In the case of Norseman Gold Plc (LON:NGL) , he got in at $40 per ounce, and Spanish Mountain (CVE:SPA) $80 per ounce.

His son in law Angelos Damaskos started the Junior Mining Fund based on these criteria - which is currently 8th out of 2795.  They will be changing the name to Junior Gold very soon. He likes: Centamin Egypt (LON:CEY), Medusa Mining (LON:MML), Norseman Gold,  Australian Focus Minerals, Spanish Mountain

Oil Shares

Damaskos also runs the Junior Oils Trust which is 87th out of 2795 Trusts. We did an interview with Angelo here. The oil share he likes is Premier Oil (LON:PMO) . When he started, he advised him to invest in Tullow Oil Plc (LON:TLW) , Dana Petroleum Plc (LON:DNX) and Cairn Energy Plc (LON:CNE) and Premier - and the only one left that hasn’t had a huge run is Premier, so he thinks it’s likely to be the next takeover.

Agriculture

The one share he likes is Monsanto (NYSE:MON) - ‘they will stop world starvation’.

Q&A

  • He's not wild about Platinum due to the uncertain political environment in Africa.  
  • Immunodiagnostic Systems Hldgs (LON:IDH) - he sees it as a good company but with 2 problems. They have a big liability to pay and they have a major competitor coming in, so it looks great on his criteria, but he would avoid because of these issues.

To finish, he reiterated that you have to have a set of criteriathat you use before investing.  Improve your criteria like you improve your golf swing. More on the man here: http://www.jimslater.org.uk/

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Norseman Gold plc is engaged in gold mining operation. The Company operates in two operating mines, which include the Harlequin high-grade underground gold mine; and the North Royal Open Pit mine. The Harlequin mine is located nine kilometers north of Norseman and 11 kilometers from the Phoenix Mill under Lake Cowan. The North Royal (North Royal) Open Pit mine is located 10 kilometers from the Phoenix Mill. The North Royal mines resource that totals 1.6 million tons at 11.6 g/t gold for 600,000 ounces. The Company’s Norseman Project is a 2,360 square kilometer project, located in the Norseman-Wiluna greenstone belt in Eastern Gold fi elds, Western Australia. It consists of 5.6 million tons at an average grade of 1.9g/t gold of Measured Resource, 6.7 million tons at an average grade of 5.1 g/t gold of Indicated Resource and 10 million tons at an average grade of 6.2g/t gold of Inferred Resource. Besides gold mineralisation, the Norseman Project also holds magnetite iron ore potential. more »

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Andor Technology Ltd, formerly Andor Technology plc, is a United Kingdom-based company engaged in the development and manufacture of scientific digital cameras for academic, industrial and government applications. The Company operates in three segments: research, microscopy systems and original equipment manufacturing (OEM). Research is engaged in sales of cameras and associated products to academia and government-funded research institutes. Andor’s Microscopy Systems business provides high-end imaging solutions that are of primary interest to life sciences research institutes. Andor offers Electron Multiplying charge-coupled device (CCD) (EMCCD), scientific CMOS (sCMOS) and CCD imaging detectors. OEM includes sales of cameras and associated products to instrumentation manufacturers. In October 2013, Andor Technology Plc acquired Spectral Applied Research Inc. In October 2013, Andor Technology plc acquired Apogee Imaging Systems Inc. more »

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Volex plc is provider of interconnect solutions and power products, servicing the telecommunications, datacoms/datacenter, industrial, consumer and medical sectors. The Company operates in four segments: Consumer, Telecoms/Datacoms, Healthcare and Industrial. Consumer sector supplies interconnect solutions and power products to manufacturers of electrical/electronic devices and appliances, including laptop/desktop computers, printers, televisions, power tools and floor cleaning equipment. Telecoms/Datacoms sector supplies customized interconnect solutions to manufacturers of equipment servicing the telecoms network, computing and datacenter markets. Healthcare sector serves key accounts in the medical equipment field, supplying cable assembly and connector solutions for a range of medical equipment. Industrial sector supplies cable assemblies to a set of industrial markets, including test and measurement equipment, manufacturing/automation, refrigeration, and renewable energy. more »

Share Price (Full)
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Mkt Cap (£m)
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  Is Norseman Gold PLC fundamentally strong or weak? Find out More »


3 Comments on this Article show/hide all

muckshifter 2nd Oct '10 2 of 3
3

Nice to hear Jim Slater is still going strong, thank you Edward. In the 70s we were building the Esher bypass which went close to his home. He came into the office to complain about the noise of a dewatering pump close to his house which was running 24/7 and keeping him awake at nights. A friend of mine, who was the earthworks foreman, went straight out and built a thick walled enclosure for the offending pump out of bales of hay. Jim turned up the next day and presented him with a crate of whisky - so, a nice bloke IMO, as complainants rarely said thanks when you dealt with a complaint in those days (mind you we did have debris punching holes in the roofs of every one of a row of seventeen houses in one notorious cutting blast in Yorkshire, so perhaps some complaints were less forgiveable)

Sorry for the off topic.
Regards.

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MrM 15th Apr '13 3 of 3

The share price of IDH was around 900p at the time of this article, peaked at 1196 in July 2011, it's now 320.
Paul Scott mentioned in one of his morning posts that the company had been hammered by competition.
Interesting that JS was warning about the problems in 2010, how did he know?

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