Jim Slater’s Zulu Principle strategy of buying growth stocks at reasonable prices (GARP) has earned a popular following among UK investors. Over the past year Stockopedia’s own Slater-inspired Zulu screen has returned 40.5%, making it one of the best performing of all our Guru Models. With the prices of many growth stocks soaring in 2013, the number of companies qualifying for the screen fell substantially. But with prices now taking a breather in parts of the market, Slater-esque GARP shares are emerging once again.

Jim Slater wrote his legendary investing book The Zulu Principle back in 1992. In it he encouraged investors to research shares thoroughly and look for those with track records of earnings growth and strong cash flow.

Stocks, he said, should also be priced reasonably in the context of their future earnings forecasts. To calculate that, he applied his famous PEG ratio (price-to-earnings-growth), which rates stocks based on the relationship between their forecast P/E and forecast earnings growth rate. The lower the PEG the better.

One of the biggest advocates of this approach is Jim Slater’s son Mark, who has used it to great effect at his MFM Slater Growth Fund. The formula has helped his fund produce one of the best returns in the UK All Companies sector over the past 12 months, at 39.9% - just a snip behind our own stock screening model.

Zulus are gathering in number

Last October we highlighted the fact the number of UK companies meeting the criteria for Slater’s Zulu strategy had fallen sharply - down from 17 to just seven through the year. At the time it seemed that the prices of many growth shares had simply gone beyond reasonable and they were failing to pass the screen on valuation grounds.

A recent example of this occurred with Utilitywise (LON:UTW) - a company that continues to be highly rated by Mark Slater. Utilitywise made it into the Zulu portfolio in March but its forecast P/E ratio has since risen to to a whisker over 20x, which means it currently fails to qualify for the screen. Despite that, a slight dip in prices over recent weeks has caused the Zulu screen to begin filling up again, with 18 stocks now qualifying.  

Zeroing in on Zulu stocks with the StockRanks

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