The Jim Slater Zulu Principle Screen hunts for growth at a reasonable price (GARP) stocks.  The idea is to find companies whose valuations are not excessive relative to their pace of earnings growth.  The screen has returned 196% in the UK over the last five years, which is an annualized 24% return (source: Stockopedia).  

This makes the Jim Slater Zulu Screen the second best performing UK screen over the period.  The only screen that beat it was the similar sounding Growth at a Reasonable Price Screen.

Market conditions have, however, been favourable to growth stocks over the last five years. Economic growth has provided a tailwind and earnings growth has, in part, been driven by the recovery from the financial crisis (i.e. home builders).

The main criterion for the Slater screen is the PEG ratio, which compares the price/earnings (P/E) ratio of a company to the earnings growth rate.  If the P/E ratio is 10X and the earnings growth rate is 20% then the PEG ratio is 0.5 (lower is better).

Fast growing companies tend to reward investors if earnings growth continues or their P/E (price to earnings ratio) rating improves.  When both factors occur together the resulting share price momentum can be dramatic.

There are currently seven UK stocks that qualify under the Slater Zulu Screen criteria.  The relatively low number of qualifying stocks reflects the strict criteria and the increase in the valuation multiples of “growth stocks.”

I will take a closer look at three companies that are currently on the Slater Zulu Screen: Gocompare.Com (LON:GOCO), S&U (LON:SUS) and iomart (LON:IOM).  It is important that stocks on the screen meet the spirit of the rules, not least with regard to earnings growth.

Slater Zulu Screen in focus: Stockopedia selection rules

The Slater PEG ratio divides the forecast rolling P/E ratio by the forecast EPS growth rate.  In his book “The Zulu Principle” Jim Slater states that he wants a PEG of not more than 0.75 and preferably less than 0.66.

An additional restriction is that a company must have at least four consecutive periods of growth, which can include two forecast periods. The PEG ratio is therefore a "growth at a reasonable price" (GARP) metric.

Slater Screen criteria on Stockopedia

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