SIF Portfolio: Jim Slater's tip expands my screen results

Wednesday, Feb 08 2017 by
22
SIF Portfolio Jim Slaters tip expands my screen results

One of the comments on my article last week made me reconsider the merits of relaxing the screen during bull markets. Apparently this is something the late Jim Slater was known to do:

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I really appreciate all of your comments each week. They always force me to double-check my arguments, which is invaluable.

John’s comment aligned with my own thinking that it might make sense to relax valuation criteria slightly during bull markets. The logic behind this change is fairly obvious. The returns from investing in quality stocks at a higher valuation might still be greater than those available from cash. By focusing on quality, downside risk should be mitigated.

I’ve not found a reference to this approach in my copy of The Zulu Principle, although I may have missed it. But I have found an exchange of letters on this topic between Jim Slater and Algy Hall, who writes about stock screening for Investors Chronicle.

You can find the letters here on Jim Slater’s official website, but these are the relevant highlights:

Jim Slater: “… The probable reason for this is that, in these difficult markets with very low interest rates and high valuations, it is necessary to stretch the price-earnings to growth (PEG) limit to about 1.3 and, in that way, avoid losing some of the best shares. …”

Algy Hall: “… rising market-wide valuations have caused you to adapt a method you have laid out in your excellent book, The Zulu Principle, by focusing more heavily on your ‘quality’ criteria and relaxing your ‘valuation’ requirement …”

The context to the discussion is that Hall’s IC screen is underperforming Slater’s Telegraph portfolio and contains a different selection of stocks. It turns out that Jim Slater has relaxed his valuation criteria, whereas Algy Hall has decided to relax the criteria for quality.

My own Stock in Focus screen is suffering from a record shortage of shares this week. Only three companies qualify at the time of writing, all of which are already in the SIF Portfolio. So I’ve decided to experiment. What choices would be available to me if I followed Jim Slater’s example and put quality ahead of value?

I wouldn’t change much

In last week’s article, I highlighted the four core factors which control my screen results:

  • Earnings yield (EBIT/EV) = Value
  • Piotroski F-Score =…

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Severfield plc is a structural steelwork company in the United Kingdom, which is engaged in construction contract business. The Company serves the construction and infrastructure markets. Its construction sectors consist of commercial offices, industrial and distribution, stadia and leisure, retail, and data centers and other. Its infrastructure sectors include transport, power and energy, and health and education. It has worked on over 120 projects, which include One Angel Court and Nova Victoria in London; Anfield Stadium; London Bridge Station; Nissan paintshop, Sunderland, and Dublin waste to energy facility. Its subsidiaries include Severfield (Design & Build) Limited, which designs, fabricates and constructs structural steelwork and portal frames for the warehouse, distribution and industrial sectors, and Severfield (NI) Limited, which delivers constructional steel products in the United Kingdom and Irish structural steel market. more »

LSE Price
67.63p
Change
0.9%
Mkt Cap (£m)
202.6
P/E (fwd)
10.5
Yield (fwd)
3.9

H&T Group plc is a non-trading holding company. The Company provides a range of simple and accessible financial products tailored for a customer base, which has limited access to, or is excluded from, the traditional banking and finance sector. Its segments include Pawnbroking, which is engaged in providing secured loans against collateral (the pledge); Gold Purchasing, which is involved in buying Jewelry directly from customers through its stores; Retail, which is involved in retail sales of gold and jewelry, and the retail sales are forfeited items from the pawnbroking pledge book or refurbished items from its gold purchasing operations; Pawnbroking Scrap, which comprises various other proceeds from gold scrap sales other than those reported within Gold Purchasing; Personal Loans, which comprises income from its unsecured lending activities, and Other Services, which comprises third party check encashment, buyback, prepaid debit card product and foreign exchange currency services. more »

LSE Price
334.63p
Change
-0.0%
Mkt Cap (£m)
124.8
P/E (fwd)
10.9
Yield (fwd)
3.4

Fulcrum Utility Services Limited is an independent energy and multi-utility infrastructure and services provider. The Company's principal activity includes the provision of unregulated utility connections and independent gas transportation services in the United Kingdom. Its segments include infrastructure services and pipelines. The infrastructure services segment is engaged in providing utility infrastructure and connections services. The pipelines segment comprises both the ownership of gas infrastructure assets and the conveyance of gas through its gas transportation networks. It provides technical engineering, design, project management, consultancy and audit services across gas and multi-utility connections. The Company designs and project manages utility connections for customers seeking either new connections or the alteration or refurbishment of existing connections. These connections range from single-site alterations to multi-utility and multi-site new connections. more »

LSE Price
65.25p
Change
 
Mkt Cap (£m)
114
P/E (fwd)
16.4
Yield (fwd)
3.2



  Is Severfield fundamentally strong or weak? Find out More »


9 Comments on this Article show/hide all

rhomboid1 8th Feb 1 of 9
5

I'm horribly biased but Severfield (LON:SFR) is my 3rd largest holding as it is in a real sweet spot at the moment,
1 they're the market leader in their sector
2 they're growing margins fast, in part by increasing the "engineered" aspect of their steelwork
3 they're growing their order bank much faster than their turnover so storing up momentum
4 they've been accumulating cash fast
5 most competitors have weak balance sheets and mgrs. of big projects assess counterparty risk constantly
6 their end markets are buoyant for now..

So I'd say go for it !

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JohnEustace 8th Feb 2 of 9
1

Well done on tracking down the source of the comment I remembered! I read the correspondence in Algy Hall's column in the IC.


Algy himself noted that when he relaxed the quality criteria Globo qualified - a clear example as to why that change in approach was an error.

http://www.investorschronicle.co.uk/2015/12/17/sha...

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Roland Head 8th Feb 3 of 9
1

In reply to JohnEustace, post #2

Thanks for the suggestion John!

Intuitively it seems more attractive to relax on value than quality. We'll have to see whether the results back up this approach...

Roland

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iwright7 8th Feb 4 of 9
1

In reply to rhomboid1, post #1

Rhomboid

I like Severfield too. My Buy in notes for January:

Newish competent CEO spearheading efficiency drive and employee share scheme. Recovery stock with stretching 2020 target to double profit. Ahead of expectations and earnings beat. Order book (+17%) and margin increasing. Increased Divi. Recent broker upgrades. QM 95 and SR 95. 52 Week High. No net debt. Ironically uncertainty over Britexit and currency weakness could reduce European completion in UK and make it easier to export. On a roll.

I hold Fulcrum too for different reasons though than its PEG and H and T look like a reasonable punt. Please though DYOR Ian

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simoan 8th Feb 5 of 9
1

Hi Roland,

I hope you don't mind but I've just been playing with the SIF screen. It's surprising how some of my current holdings don't qualify based on one rule e.g. Walker Greenbank (LON:WGB) To get more companies through the screen IMHO it would be better to shorten the Relative Strength period to 3 or 6 months rather than compromise on quality or value. Just an idea, but having experimented it does throw up some credible SIF candidates.

All the best, Si
 



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ISAallowance 8th Feb 6 of 9

In reply to simoan, post #5

I agree with simoan - relative strength would be an obvious candidate to consider relaxing, particularly as a lot of relative strengths have been affected by a large external event of unknown outcome (Brexit) rather than the earning statements from the companies themselves. Go-Ahead (LON:GOG) comes to mind as one I think you ejected from the SIF portfolio due to the relative strength requirement just as I was buying it on the grounds it was now very good value.

| Link | Share | 1 reply
Roland Head 9th Feb 7 of 9
1

In reply to simoan, post #5

Hi Si,

Thanks for your comment -- by all means play with the screen, I'm sure it can be improved on!.

The RS rule has been frustrating at times over the last year, especially after the referendum when it prevented me adding a number of credible stocks to the portfolio (because their share prices had slumped).

A shorter RS period is one of the items on my review list for the end of the year.

Regards,

Roland

| Link | Share | 1 reply
Roland Head 9th Feb 8 of 9

In reply to ISAallowance, post #6

Indeed, I'd really like to have kept Go-Ahead (LON:GOG) in the portfolio.

Although I have to beware of the temptation to change the rules to suit my own stock choices. That's not the point at all!

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simoan 9th Feb 9 of 9
2

In reply to Roland Head, post #7

Hi Roland,

I certainly wasn't trying to improve it! But you asked the question about your criteria so thought I'd look in a bit more detail. I haven't been a big user of screens in the past, so I'm quite interested in what other people use them for and the SIF screen seems to be set up to find the type of GARP shares I normally invest in which makes it of particular interest.

I continued playing around with the rules last night and quite like the idea of using both 3 and 6 month RS as a measure of momentum i.e. RS 3m > 0 AND RS 6m > 0.

All the best, Si

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About Roland Head

Roland Head

Private investor & writer on stock markets with a particular fondness for free cash flow, dividends and value, plus an interest in resource stocks.In earlier life, I worked as an engineer in telecoms and IT. The quantitative, rule-based mindset required for this type of work is probably reflected in my investment style. Another factor that affects my investment choices is my experience working for a large telecoms company at the turn of the century, when tech stocks were booming. Watching this bubble inflate and then implode from the inside was very educational. more »

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