Investing like Jim Slater — Part 2: Why has the Slater Screen Beaten the Market?

I recently wrote about Jim Slater and the evolution of his investment strategy from the 1960s through the 1990s. I was delighted by the thoughtful and challenging questions from erudite readers. The strategy has returned over 1300% since inception — a very solid result, particularly given recent market conditions. Naturally, the question arises: how has the screen achieved this result? In this article, I unpack the performance in detail by taking several lines-of-inquiry, including the following:

• How do we actually construct the portfolio tracked by the screen?
• How has the number of holdings in the screen changed over time, and what are the reasons behind those changes?
• How has the strategy performed on a year-by-year basis, and which stocks have driven these returns?

By the end of this article, you’ll have a clearer view of how the Slater screen ‘works’ and some practical takeaways for your own approach to stock picking.

How do we construct the portfolio?

In many ways, the chart reflects a hypothetical return. We do not invest real money and the chart does not reflect transaction costs, like broker fees. It is also worth noting that the screen does not generate a buy-list that can be copied directly into a portfolio. At the moment, the screen only produces three results — a woefully undiversified selection. The screen simply highlights stocks that meet the selection criteria outlined in Jim Slater’s books, The Zulu Principle and Beyond the Zulu Principle. In this sense, the screen is just a research tool; it streamlines the research process for investors who are following a specific investment approach — in this case, the Slater approach.

It’s worth reviewing the Zulu Principle rules.

1. Slater PEG ratio: less than 0.75;
2. Price-to-earnings (P/E) ratio: less than 20;
3. Earnings per share (EPS) growth: greater than 15%;
4. Relative strength (1 year): positive (> 0%);
5. Return on capital employed (ROCE): greater than 12%;
6. Market capitalisation: between £20 million and £1 billion.

There are two nuances that we should clarify: first, we use broker forecast earnings, not historic earnings; and second, we use the Slater PEG ratio, which incorporates an additional restriction: a company must have 4 consecutive growth periods, including two forecast periods. As such, this rule incorporates an earnings streak aspect.

We create a 'dummy' portfolio using the following process: The screen is rebalanced once every three months. At each rebalance, we buy all stocks that meet the criteria and sell any that no longer qualify. Stocks are then held for three months, after which the process is repeated. If more stocks meet the criteria during the three-month period — i.e. between rebalance dates — they are not added to the portfolio. Holdings are only updated quarterly. Indeed, the number of holdings in the screen changes in a ‘step-like’ pattern: it updates periodically and remains flat between rebalance dates.

Are Slater Stocks Becoming Scarcer?

The number of stocks qualifying for the Slater screen has decreased. This means that fewer stocks currently have a low PEG ratio and/or strong earnings growth. In other words, it has arguably become more difficult to find growth at a reasonable price…

This trend is consistent with the broader macroeconomic picture. Readers will know that there has been a paucity of UK growth stock IPOs in recent years. Moreover, various commentators, including Ray Dalio, have argued that we are going through a ‘paradigm shift’. A paradigm is a relatively long period (10 years) in which markets ‘operate in a certain way’. After 2009, profits and stock prices were propped up because central banks lowered interest rates. Interest rates are of course higher these days. This makes earnings growth harder, primarily because higher rates increase the cost of borrowing while reducing consumer spending and business spending. This affects companies’ revenues and profits. Profit margins have also been squeezed by geopolitical factors, like the Ukraine War and higher energy costs.

Fewer Stocks: Lower Returns or Consistent Results?

Interestingly, even as the number of stocks has declined in recent years, the screen continued to outperform the market…

This positive trend has been driven by a small number of stocks. During the last quarter of 2023, the only holding was Journeo (LON:JNEO) which delivers transport system solutions. It went from around 229p in October 2023 to 269p in January 2024 — a 17% gain. This trend was supported by bullish financial reports. In September 2023, the CEO said, ‘I am delighted with the results for the six months ended 30 June 2023.’ Another trading update in November noted that profits would be ‘ahead of current market expectations.’ Margins were set to rise, supported by supply chain recovery, new contract revenues, and efficiencies from an integration programme.

Between April and July 2023, the only holding in the screen was Medica (LON:MGP^G23). We can see that the performance of the screen mirrored the performance of Medica (see below). Medica provides telemedicine services and received a cash takeover bid at a 33% premium. One can argue that the Slater screen ‘got lucky’, but the counter argument is that the screen deliberately targets good quality, growing companies, trading at cheap multiples. In this sense, the screen applies a bargain-hunting approach similar to that of buyout firms.

Slater Screen

Medica share price

Only three companies qualified for the Slater screen in 2023: the above two and also Foresight group (LON:FSG) which fell by 8% during Q1 of 2023. Foresight’s loss was more than cancelled out by the gains from Journeo (17%) and Medica (35%). So the sample is small. It was also small in 2022. Let’s examine two more cases:

• ME International (LON:MEGP) was in the Slater screen for most of 2022, entering in April and exiting the following January. The firm sells and services instant-service vending equipment. The group delivered a stronger-than-expected first-half results, led by a robust recovery in Europe. This momentum carried into the second half, supported by rising consumer demand across all services. The MEGP went up by 66% while it was in the screen.
• Another strong performer was iEnergizer (LON:IBPO^E23), an integrated software and service company. It was cheap, with a relatively low P/E ratio (around 16), possibly reflecting ownership risk — Anil Aggarwal, the CEO, owned over 82% of the shares. It was also growing. Results were ahead of expectations in February 2022. In June of the same year, the firm reported that revenues were up 32%. It was in the Slater screen for one quarter in 2022 (Q2) and went up 25%, from 386p to 485p.

The screen generated the strongest returns in 2013 (52.7%). It’s worth noting that these results were comparable to the returns generated by Jim Slater’s ‘Capitalist’ portfolio. In 1963, Slater wrote an investment column in The Sunday Telegraph under the pseudonym of ‘Capitalist’. The ‘portfolio did appreciate in value by 68.9% over two years, against a market average of 3.6%.

In 2013, the performance of Stockopedia’s Slater screen was driven by a relatively large number of holdings. Brammer (LON:BRAM^B17) provided industrial maintenance and repair services. It was in the Slater screen during Q1 2013 — when it rose by 25% — and again in Q3 2013 — when it rose another 47%. This upwards price momentum was supported by bullish results and optimistic guidance from the directors. For instance, in February 2013, the Chief Executive noted that, ‘the group has produced substantially increased sales and profits and the acquisition of Buck & Hickman has exceeded our original expectations… Our confidence in the outlook for the business is reflected by the dividend increase.’

A Closer Look at Overall Winners

Now that we have drilled down and examined the year-by-year performance, it’s time to take a broader look at the top performers overall. Some companies appeared in the screen longer than others, so we’ve annualised the returns to allow for an easy side-by-side comparison…

It’s worth mentioning Games Workshop (LON:GAW) which appeared in the screen at the start of October 2017 and exited at the end of December — jumping 33% during this period. The company has appeared in numerous articles highlighting top performers over time. In Makings of a Multibagger, Ed noted that Games Workshop didn’t just 10x — i.e. grow earnings tenfold. Earnings grew fourteen-fold a 10-year period! And here’s another interesting insight from Roland, commenting on dividend growth:

An investor who invested in Games Workshop (LON:GAW) 10 years ago might have paid around 500p per share for their shares. If they’d held on to those shares, they would have received 420p per share in dividends alone during the company’s 2024 financial year.

At the top of the table is Gaming Realms (LON:GMR). Annual results, announced in March, were positive, with revenues and profits both up. The icing in the cake was a positive statement from the Board: ‘Looking forward, the Group is well placed to deliver further growth in new and existing markets… The Board is confident in the Group's strategy and expectations for the rest of the current year.’

The other company worth mentioning is Xaar (LON:XAR), which develops digital inkjet technology. It was in the Slater screen during Q1 2013, when the price jumped by around 16%. It entered the screen just days after a trading update which reported strong demand, ‘with sales in the fourth quarter running ahead of the Board's expectations’. The screen would have captured the post-earnings-announcement drift (PEAD) — the tendency for stocks to keep moving in the direction of an earnings surprise. Xaar was also in the screen during the last quarter of 2013, when the price moved 40%. It had the classic profile of a growth stock. Interim results in August 2013 noted that ‘sales increased across all markets, with revenue growth being led by sales in ceramics.’ The company enjoyed particularly strong demand from tile manufacturers in China. Xaar had an edge in digital inkjet solutions, which were regarded as better than traditional analogue techniques.

Why has the Zulu Principle outperformed?

The screen has consistently beaten the FTSE All Share, outperforming every year except 2014, 2016, and 2024. In the earlier years (pre-2017), this outperformance came from a relatively diversified portfolio. More recently, returns have been driven by a smaller group of shares, including Medica, ME International, and iEnergizer. Company-specific qualitative factors contributed to this trend—for example, Xaar was a leader in digital inkjet solutions. At the same time, several quantitative and systemic factors also supported performance.

1. The screen can be effective at capturing the Post-Earnings Announcement Drift—the tendency for stocks to continue rising after beating earnings expectations. Since the screen targets companies with high earnings growth, it’s unsurprising that many of the top performers had earnings ‘ahead of expectations’, as illustrated by the case studies discussed above.
2. The screen also aligns strongly with two factors that drive price returns. First, Quality—profitable, financially sound, cash-generating firms tend to outperform. Second, Momentum—stocks with strong price momentum also tend to outperform. The current qualifiers have high a MomentumRank and QualityRank, as the bubble charts illustrate. One might expect these stocks to also score well on Value, given the low PEG criteria. However, our ValueRank is based on historic earnings, while the Slater screen uses forecast earnings, so qualifying stocks do not always have a strong ValueRank.

Next steps

The elephant in the room is that only three companies currently qualify for the Slater screen. Investors who want to analyse a broader pool of Slater-style opportunities have several options. First, they could relax the criteria—though the risk here is that weaker stocks slip through, since the point of screening is to filter for quality. Alternatively, they could use a ranking system rather than a strict cut-off. For example, instead of targeting only companies with a PEG below 0.75, they might focus on those ranked in the top decile for PEG. Our screening tools make this kind of filtering possible (see below). It’s also worth noting that investors can use rankings across other factors that have historically driven returns. Another option is to look for international holdings. There are 20 stocks in the Slater screen for Europe. The performance has been just as strong.

We noted that many of the top performers generated earnings ‘ahead of expectations’. So how can investors find these kinds of stocks? One option is to filter news for results and trading updates (see below). While investors could read every trading and results statement each day, it’s usually more efficient to combine news flow with screening. For example, investors might set up a screen for cheap, high-growth companies, then regularly review the news of those that meet the criteria.