Mark Slater, one of the UK’s top performing growth investors, once told me that there’s “something comforting about owning really good quality businesses”. In particular, he said, their quality meant he rarely had to worry about their financial results. “You know the results are going to be good - the management are good and they focus on the right things. The problem is they are rare and they are quite difficult to identify.”
When it comes to picking good quality growth stocks, Slater has delivered several years of impressive results at his Slater Growth Fund. His record is an big endorsement of an investment strategy first conceived by his late father, Jim Slater.
Jim Slater is a legend among many British investors. His career took him from buccaneering City dealmaker to being a leading authority on how to find the most promising growth stocks in the market. Indeed his book, The Zulu Principle, which documents his strategy, is a bible for growth company investors everywhere.
At Stockopedia, our modelling of the kind of rules used by Slater shows how reliable this kind of approach can be over time. Over the past year it has seen a modest 12.6 percent gain, but a more striking 43.3% over two years. The main challenge is that in bull markets when growth stocks become expensive, this “growth at a reasonable price” strategy can struggle to find high numbers of qualifying shares.
How the Zulu strategy works
Central to Slater’s growth strategy is a focus on investing in companies that are poised to deliver impressive earnings growth but can still be bought at a reasonable price. These are typically small, profitable stocks with robust cash flows, low debt and share prices that are already rising.
Slater was keen to find firms with strong competitive advantages, offering new products or services that were steered by effective and enthusiastic management.
One of his most distinctive tools for picking these Zulu shares is something called the price-earnings growth factor, or PEG. He saw this as a crucial measure of whether a stock offered an attractive trade-off between price and growth.
The PEG is worked out by dividing forecast price-to-earnings ratio (PE) by the expected rate of earnings-per-share growth (G). As Slater saw it, stocks with a PEG of less than 1 had higher growth rates than their PE ratios and were thus ‘cheap…
