“Investment is the art of the specific and selection is far more important than timing.”
Of the stalwarts of stock market investing, Jim Slater’s enduring appeal to UK private investors perhaps owes the most to his obvious affection for high quality but not overpriced growth companies. For the former City corporate raider, broadsheet columnist and children’s author, growth companies require careful and considered selection. After all, while buying into a growth story at the right moment and at the right price is paramount, these are companies that an investor could conceivably keep in a portfolio for very many years – come bulls and bears.
Never short of a forthright view and always amenable to sharing his views on stocks, Slater’s 1992 book The Zulu Principle has gone on to become a modern classic amongst private investors. In it, he not only sets out a carefully calibrated technique for measuring a company’s growth potential but he also encourages investors to do their own digging, to read between the lines and interpret information in a way that will give them an edge.
His approach starts by sieving the market for potential growth stock candidates and identifying which of them are attractively priced. The first hurdle for any company is ownership of a proven record of earnings per share (EPS) growth together with broker forecasts that the growth will continue by at least 15% over the next couple of years. “This gives you an arithmetical fix on the company,” Slater explains. Importantly, the stock must have four years of EPS growth – historic of forecast, or a combination of the two.
While scrutiny of past and future growth form the backbone of his screening technique, Slater’s commitment to the story behind a stock is what makes his approach intriguing to adopt. Investors are urged to scrutinise companies and filter the basket using a common sense set of criteria.
For instance, small, profitable companies with strong cashflow and low debt and signs of strength in their shares are important, while sectors that are less susceptible to cyclical patterns are preferred. Meanwhile, a competitive advantage, strong management and signs of optimism in the chairman’s statement are all pluses. Finally, a critical moment, such as a new CEO, as well as directors buying shares are also on the checklist.