When Jim Slater wrote The Zulu Principle back in 1992, it quickly caught on as an investing bible for anyone that wanted to find great growth shares at reasonable prices. It also cemented a remarkable return for a man who made and lost a fortune during his days as a swashbuckling City dealmaker two decades earlier. Since then, the strategy has proved to be highly effective at picking out growth stars and this year has managed to find some of the best performing stocks in the market. The bad news is that these Zulu shares are getting harder to find.
Slater devised his investing process while penning a regular Sunday Telegraph column under the nom de plume ‘the Capitalist’. The appeal of the book that followed owes as much to his enthusiasm and solidarity with regular investors as it does to the investing thesis that underpins it. Slater wrote The Zulu Principle with assistance from his son Mark who has used the the strategy at his MFM Slater Growth fund with notable success over the past three years, earning it top performing fund in 2010 by industry researcher, Trustnet.
In search of growth
Slater’s rules for buying and selling growth shares at the right moment and the right price focus on earnings growth in generally small, profitable companies with strong cashflow, low debt and signs of strength in their shares. Among the most important features is what’s known as the the PEG, or the ‘price-earnings growth’ factor. This handy value metric measures whether the promise of growth comes at a reasonable price and does it by studying the relationship between the forecast price-to-earnings ratio and the expected rate of earnings-per-share growth. You can read much more about Zulu Principle investing here.
At Stockopedia, our interpretation of the Zulu Principle Rules has outperformed the FTSE 100 for the last two years - with a 43.9% return in the last 12 months versus a measly 10.8% for the FTSE 100. That performance also measures up well against the MFM Slater Growth fund which returned 19.5% over the same period, perhaps going to show how running large amounts of money can reduce the opportunity set available. The screen performance has been driven by some spectacular individual gains including shares in industrial printhead supplier Xaar (LON:XAR), which were picked up last December at 292p and have since risen by 171%. Recruitment group Staffline (LON:STAF) has also been a big success, rising this year by 106% to 595p, and housebuilder Telford Homes (LON:TEF), up 56% over the same period to 289p. Greek IT group Globo (LON:GBO), which has a balance sheet that divides opinion among investors, was brought in to the portfolio in June and has since seen its share price rise by 99% to 84p.
But while the Zulu Principle portfolio has performed exceptionally well, the average number of companies qualifying for the screen has fallen from 17 to just seven during 2013. That hit rate is symptomatic of increasingly frothy market conditions causing a dearth of reasonably priced growth stocks. Among the current qualifiers are companies such as Regenersis (LON:RGS), which specialises in fixing mobile phones, laptops and other electrical equipment for major manufacturers. It qualified for the screen in early October following a sharp rise in its share price and recently issued a strong set of full year results in which it said that its rapid growth rate could be sustained. Property consultancy Savills (LON:SVS) is also a comparatively recent qualifier, just making it in time to be brought in to the portfolio when it was rebalanced in mid-September. Half year results in August showed the company performing well in its core UK and Asia Pacific markets, although Continental Europe and the US are still unprofitable. Even so, improving conditions, particularly in the UK, seem to have given it enough confidence to expand in its smaller markets in order to reduce those losses.
It’s worth noting that in Europe the Zulu Principle screen is also performing exceptionally well, up by 23.7% since May against its FTSE Eurofirst 300 benchmark of just 3.4%. Indeed, with 24 companies currently qualifying under the Slater rules there is also a lot more for investors to go at across the Continent. You can see the list of companies currently ticking all the boxes as Zulu stocks in Europe, by using Stockopedia's Europe Edition.
A strategy with enduring appeal
Market conditions this year have provided a rich pool of potential Zulu stocks, a handful of which have propelled Slater’s growth strategy towards the top of Stockopedia’s best performing screens. After a few years of muted economic growth, that surging performance was well overdue but rising markets are now making it more difficult to find tomorrow’s growth stars with the requisite attractive valuations. The other concern with the Zulu strategy is that it relies on forecast earnings and thus can possibly be riskier in a downturn. Even so, the strategy’s recent effectiveness, together with Slater’s huge popularity and compelling personality are likely to keep it a favourite of many UK stock pickers.
As always with any quantitative screen, it's always important to Do Your Own Research but this approach provides a compelling starting point.
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Filed Under: Growth Investing,