Slater Zulu principle screen: three stocks in focus

Friday, Aug 03 2018 by
Slater Zulu principle screen three stocks in focus

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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Goco Group PLC, formerly Group plc, is a holding company. The Company's principal activity is providing an insurance price and product comparison Website. Its segments include Insurance and Strategic Initiatives. It operates a United Kingdom-based price and product comparison Website, offers an online service that enables consumers to compare the prices and features of products. The comparison services provided under the Insurance segment include over 400 brands and are split into three categories: motor, property and other. The Company operates its own Website platform for car, motorbike, van, home and pet insurance comparison services, displaying a range of products offered by its panel of insurers. The products compared under the Strategic Initiatives segment include over 250 brands and are split into three categories: money, home services and other. The Company's subsidiaries include Finance Limited and Limited. more »

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S&U plc is a United Kingdom-based company engaged in providing motor finance and specialist lending service. The Company is focused on the specialist motor finance market. The Company's subsidiary, Advantage Finance Limited (Advantage Finance), is engaged in the motor finance business. Advantage Finance offers motor finance to over 100,000 customers in the United Kingdom. more »

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iomart Group plc is a holding company. The Company is engaged in providing secure managed hosting and cloud services. The Company operates through two segments: Easyspace and Cloud Services. The Easyspace segment provides a range of shared hosting and domain registration services to micro, and small and medium-sized enterprises (SME) companies. The Cloud Services segment provides managed cloud computing facilities and services, through a network of owned datacenters, to the larger SME and corporate markets. The Cloud Services segment uses various routes to market and provides managed hosting services through iomart Hosting, RapidSwitch, Melbourne, iomart Cloud Services, Redstation, Backup Technology, ServerSpace and SystemsUp. Its products include CloudSure Hosting Solutions, Managed Services, Storage, Network and Control Panel. It provides Infrastructure as a Service platform and EMC Avamar Cloud Backup for LabVantage Solutions, Inc., a global laboratory informatics provider. more »

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  Is LON:GOCO fundamentally strong or weak? Find out More »

17 Comments on this Article show/hide all

unwise2 3rd Aug '18 1 of 17

Where have you got the figure of 61% EPS growth for IOM? The stock report claims 38.5% which is wrong. Like a lot of companies on Stocko IOM's historic normalised EPS figure is wrong. If you check the latest results RNS you will see adjusted EPS is claimed to be 16.99p, since EPS (adjusted) is forecast at 19.9p expected growth is ~17%.

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Mike888 3rd Aug '18 2 of 17

I would be wary of putting too much emphasis on yr2 eps forecasts

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Andrew L 3rd Aug '18 3 of 17

In reply to post #387809

unwise2 - Thanks for spotting that. Growth rate fixed. What is interesting is that you highlight another reason why a company may dubiously qualify for the Slater Zulu PEG i.e. one off accounting factors boosting the earnings growth rate in a single year. According to your above numbers, Iomart wouldn't qualify on the Slater Zulu PEG criteria. Worth checking as the PEG is the hardest Zulu Screen criteria to qualify under i.e. a company must be both growing profit fast and have a low P/E ratio.

With regard to EPS, I was using the Stockopedia normalised figures. This is because these are the numbers used to calculate whether a company qualified for The Slater Zulu Screen. I guess the main point is that if a stock is on the Slater Zulu Screen is a GARP screen (growth at a reasonable price) then you don't want growth to just be driven by one-off factors. If it is, then the pace of growth is likely to fall back fairly quickly. So you are buying transitory growth which is not as valuable as long-term growth.

Adjusted versus Stockopedia normalised EPS is always an area for debate. It depends how strict you are in taking the company's word on things. Stockopedia and other platforms can't really unpick things for each company in terms of whether the adjusted numbers give a true and fair view. It is a judgement call in each case. However, individual investors can take the time to do that. 

According to Iomart:

"adjusted earnings per share is earnings per share before amortisation charges on acquired intangible assets, share based payment charges, mark to mark adjustments in respect of interest rate swaps, acquisition costs, interest on contingent consideration due, gain on revaluation of contingent consideration and non-recurring costs and the taxation effect of these."

On the above I think the following makes sense:
1) Amortisation charges of acquired intangible assets - Yes I would ignore this. The accountancy rules/norms here appear to be strict and it is usually the case that acquired intangibles are not wasting assets. However, this would have to be looked at in more detail on a case by case basis.
2) Share based payment charges - I would take this into account as share based payments are a real business cost
3) Mark to mark adjustments in respect of interest rate swaps - I would ignore this as it isn't part of the ongoing business.
4) Acquisition costs - I would include these costs. They are likely to be ongoing as this is an acquisitive business.
5) Interest on contingent consideration due - I would also include these costs as acquisitions are an ongoing part of the business.
6) Gain on value of contingent consideration - I would ignore this as Iomart isn't in the business of buying and selling companies for profit.
7) Non-recurring costs and taxation effect of these - I might include these if they came up most of the time.

So as you can see from the above it is a mixed bag in terms of whether Iomart's adjusted numbers make sense. However, I would always include share based payments as costs as these will almost certainly be ongoing. I am very surprised when companies strip out share based payments from adjusted earnings/profits.

At the same time I would generally concur with the view that we can ignore the amortisation of acquired intangibles.  This subject was covered by Graham in SCVR recently with regard to Begbies Traynor (LON:BEG).  So there is some material there to look at (in Graham's comments and also in the discussion section).

Thanks for your comment!

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unwise2 3rd Aug '18 4 of 17

In reply to post #387869

Which EPS figure shall I use is one of the toughest questions I face on a daily basis. I am frequently faced with 3 different options: reported, normalised as reported by Stocko and adjusted.

It appears that the forecast EPS numbers listed on Stocko are nearly always on an adjusted basis, so if I want to work out year on year forecast growth I go to the adjusted figure in the most recent results.

Some companies have similar reported/adjusted and others have large differences. If there is a large gap I check the operating cashflow to see how that compares.

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Andrew L 3rd Aug '18 5 of 17

In case of interest S&U (LON:SUS) trading update out today. Graham may cover it in SCVR. However, it does provide some colour in the growth rate for the group's main market and the company's own growth rate.  I saw them present at a Sharesoc event and it is an interesting business.  The company is also covered on Maynard's blog:

Trading period covered is from 18 May 2018 to 31 July 2018.  So about two and a half months of the first half period to 25 September 2018.  Update is available on the RNS news service:

Market growth rate for car finance:

"recent Finance and Leasing Association data shows the used car finance market we serve has been growing by 12% year on year."

S&U (LON:SUS) car finance (Advantage Finance) growth rate

"Customer numbers now stand at a record 58,100, 18% up on last year."

Credit quality

"although impairment continues to run at higher levels than last year, recent underwriting refinements have led to early indications of an improvement in both new customer quality and early repayment performance."

Relatively new property bridging business (Aspen Finance):

"Aspen Bridging, our new bridging lender, has made a promising debut and is now profitable."

"[Aspen] recently won New Product of the Year at the Bridging and Commercial industry awards.  Debt quality, as reflected in its repayment performance, is good. Its loan book now exceeds £16million from £11million at year end."

Outlook and trading

As a family run business the overall tone tends to be cautious.  It is also hard to give a clear outlook when future credit impairments are unknown and a key business driver.  Chairman's outlook:

"Both businesses give me every confidence that S&U will continue to deliver consistent improvements in shareholder value."

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Andrew L 3rd Aug '18 6 of 17

In reply to post #387879

Leon Boros video on these issues is well worth a look:

Worth checking earnings against cashflow as you say.  However, I think that options/share awards go under the financing heading in the cashflow statement.  So that may not be picked up.  

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Andrew L 3rd Aug '18 7 of 17

In reply to post #387864

Mike888 - That is true. Earnings forecasts two years out are not worth putting too much emphasis on. But it can pain part of a picture. A key clue is if forecast earnings growth two years out declines versus the one year forecast earnings growth. This suggests that the earnings growth rate used for the Slater PEG ratio is driven by one-off factors.

The question we are asking is this: Is the earnings growth rate that is used for the PEG ratio realistic? Or is the pace of earnings growth in that year just a one off?

If the latter is the case then the Slater Zulu principle screen stocks may not be great GARP (growth at a reasonable price) stocks. This is because the growth rate to calculate the PEG is driven by one-off factors i.e. the Slater PEG ratio is low because we are buying transitory growth which is less valuable.

To assess the long-term earnings growth rate we can look at the historic performance and we can look at forecast earnings two years out. We can also look at historic revenue growth and forecast revenue growth. We can also look at the drivers of revenue growth (acquisitions etc).

Very high organic earnings growth over a long time period is very valuable. Examples include Microsoft after the launch of Windows 95 and Apple after the launch of the iPhone. The trouble is that the market will probably anticipate that these companies have secular earnings growth. This is likely to push the P/E up and they may therefore not qualify for the Slater PEG ratio.

An example in the UK is probably Domino's Pizza (LON:DOM) which had a fairly high P/E ratio for much of its early life. So it may not have qualified on the Slater Zulu Screen but given that earnings growth was secular in nature it was worth paying up for.

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jonesj 4th Aug '18 8 of 17

As you say, Go Compare is reporting flat revenue. Admin costs have increased, but despite this, they have somehow managed to report an increase in adjusted profits.

There is additional debt on the books & this is because  they have spent £45.1 million on purchasing 2 other businesses this year. My Voucher Codes (£36.9m) & Energy Linx.

I initially started looking at this trying to figure out why the PE and PEG are so attractive.

Well, it seems the G part of it on the core business is flat & they are making acquisitions.    Much less attractive than organic growth, as we're now relying on the ability of the management to acquire & integrate businesses properly.

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Andrew L 5th Aug '18 9 of 17

In reply to post #388199

Good points. Gocompare.Com (LON:GOCO) only really qualifies for the Slater PEG and rapid growth this year due to acquisitions and margin expansion. So mainly one-off factors rather than the long-term earnings driver of organic revenue growth.  However, if online switching is seeing secular growth then the stock may be attractive given the relatively modest P/E ratio and strong cash generation.  This depends on the group at least maintaining its competitive position.

Gocompare.Com (LON:GOCO): some quick thoughts on the results in case of interest.  Just preliminary and unpolished comments (there may be mistakes!).  In a competitive sector, it is always hard figuring out who the winners will be.

Gocompare.Com (LON:GOCO) is not a bad business in my view. Revenue was up 19.5% in 2016 and 5.1% in 2017. This was driven by organic growth as goodwill in the accounts was only £2.5m at the end of 2017. Looking back and revenue was up 3% in 2014 and 5.2% in 2015. The strong pace of revenue growth in 2016 and 2017 was largely due to increased advertising expenditure to drive volumes.

They haven't done large acquisitions until H1 2018 when they bought Myvouchercodes and Energylinx. The former for £36.5m and the latter for £10m in cash. Acquisitions are worth doing if they strengthen and drive growth in the core business (i.e. complimentary deals). Both of these deals should help to do just that. On face value I think these deals make sense. Deals that strengthen the core business and improve the general customer offering are worthwhile in a competitive area (i.e. Facebook buying Instagram and Whatsapp).

However, revenue in the core business fell in H1 2018 but this could reflect changing market conditions. Also the Gocompare.Com (LON:GOCO) reward offers was only launched in April (i.e. Q2) and so only boosted the second quarter.  Some small investments that Gocompare.Com (LON:GOCO) have done don't appear to strengthen the core business and may not work out i.e. Mortgagegym and Souqalmal. But these are relatively small deals.

However, any future deals strengthen the core business then they are probably worthwhile. £MONY's takeover of Moneysavingexpert, for example, was a good deal. Gocompare.Com (LON:GOCO) can certainly afford to do deals given its strong cash generation. On current forecasts, Gocompare.Com (LON:GOCO) is expected to be in a net cash position by the end of 2020 (the dividend payout ratio is modest).

Gocompare.Com (LON:GOCO) is largely driven by car insurance switching and isn't as diversified as Moneysupermarket.Com (LON:MONY). With car insurance premiums falling in the UK there may be less people switching.

The crux is the pace of organic revenue growth going forward. This is driven by volume and price in the core business. Volume relates to market growth and the group's market share.

Gocompare.Com (LON:GOCO) is a very profitable business with the adjusted operating profit margin 27.7% in the first half of 2018. The hard part is figuring out where we are in terms of long-term growth outlook for the price comparison sector and the competitive dynamics.

Generally, buying high quality businesses when they see share price weakness is a good strategy. The key with Gocompare.Com (LON:GOCO) is that they retain their market position and execute acquisitions reasonably well.

I think there are two ways to view Gocompare.Com (LON:GOCO). The first is as the upstart price comparison player with a good brand that grow fast by taking market share from rivals. The second is as a weaker player in the market that will always be behind and struggle versus Comaprethemarket, Moneysupermarket and  Which of these views you take largely determines the investment case for Gocompare.Com (LON:GOCO). Gocompare.Com (LON:GOCO) appears to have a strong brand but people can't resist cute Meerkats and the cinema offers etc that Comparethemarket sells itself on.  My best guess is that Gocompare.Com (LON:GOCO) can probably hold its own.

If you do a zPE ratio (zero debt and zero cash) for Gocompare.Com (LON:GOCO) the forecast comes in at 13.9X for 2018, 12.7X for 2019 and 11.5X for 2020. I calculate this by doing forecast EV/EBIT * 1.2 (tax rate assumed to be 20%). The same ratios for Moneysupermarket.Com (LON:MONY) are 17.2X for 2018, 16X for 2019 and 14.76X for 2020. So Gocompare.Com (LON:GOCO) trades at a discount  - if we structure the P/E so that both companies have zero debt/cash on the balance sheets.

The concerning part of £GOCO's interim results was the 12.9% fall in price comparison customer interactions and the 12.1% fall in savings made by customers. This was despite the launch of the customer rewards programme dining incentive in April. It is interesting to note that Comparethemarket recently launched a similar 2 for 1 dining scheme that is similar to £GOCO's offer i.e. companies in the sector copy each other.

Moneysupermarket.Com (LON:MONY) reported a 3% increase in insurance revenue in the first half (mostly car insurance switching) and so Gocompare.Com (LON:GOCO) appears to have underperformed.

Price comparison is a competitive market place with the next player just a click away. But it is also a very profitable sector. £MONY's operating profit margin was 30% in H1 2018 while £GOCO's was not far behind at 27.7%.

Probably, in a sector like this it makes sense to be diversified rather than bet on one company -  Gocompare.Com (LON:GOCO) and Moneysupermarket.Com (LON:MONY) are the listed "pure plays."

If Gocompare.Com (LON:GOCO) hits its forecasts, the free cashflow yield is a robust 7% in 2018, 8% in 2019 and 9% in 2020. This compares to 5.3% for MONY in 2018, 6% in 2019 and 6.3% in 2020. So while Gocompare.Com (LON:GOCO) clearly had a mixed H1 2018, if it can get back on track the free cashflow yield is attractive.

The group did say that it still expects to meet profit forecasts for the full year.  The voucher deal with The Sun newspaper could be interesting and Gocompare.Com (LON:GOCO) will launch the first savings as a service product in H2 2018.  

A positive note is that the customer conversion rate was up 10.7% in Q2 2018 versus a year ago.  This was bolstered by the launch of the reward programme in April: "The feedback we've had so far indicates that this [dining incentive] is helping to drive purchase preference for the Gocompare brand."  They state that since April 80,000 people have taken up the offer.  

Conversion is a key driver for the price comparison sector and the improvement supports the case for having bought Myvouchercodes.  Stronger conversion bodes well for profitability and growth in H2 2018.

As far as I can see, Gocompare.Com (LON:GOCO) management is good. They increased the pace of revenue growth in recent years and have also improved profitability.  In my view, M&A is a good strategy if it drives growth or the competitive position of the core business.  The risk is that management pursues M&A that doesn't make sense.  

On balance, the weakness of the core business weakness in H1 2018 may not be reflective of the long-term revenue growth outlook. This is always the million dollar question - is the latest update part of a trend or just driven by one off factors?  The deal with The Sun should provide a boost in the second half.

The near-term risk for investors is that they don't meet second half forecasts for 2018 and they have previously said that results are H2 weighted.  I think H2 will be stronger than H1 due to the positive impact of acquisitions and their impact on the core business.  With regard to the outlook the group stated that:

"We remain confident of meeting our expectations for the full year 2018.... We are excited about H2 2018 and are on track to deliver the first product under our Savings as a Service model by the end of the year."

When Gocompare.Com (LON:GOCO) is done with its acquisition strategy the business should be a cash cow for investors.  Moneysupermarket.Com (LON:MONY) for example paid out 72% of earnings as a dividend in 2017.  This compares to a 21.5% payout ratio from Gocompare.Com (LON:GOCO) in 2017 (target ratio currently 20-40%).  If Gocompare.Com (LON:GOCO) had the same payout ratio as Moneysupermarket.Com (LON:MONY) in 2018 (on forecast earnings) then the yield on offer would be 5% versus the actual 1.7% forecast yield.  The yield in 2019 would be 5.6% versus a forecast 1.96%.

Savings as a Service - The launch of this by the end of 2018 is very interesting in my view.  It is expected to be a "driver of medium term growth."  The visions is "Automatically saving households on their bills - forever.  No more overspending.  No more confusion.  No more bill worries."

This is an "automated service that switches customers when a better deal is available."  This should improve the loyalty of Gocompare's customer base and increase their level of switching.  It may also attract the non-switchers to the company.  Non-switchers generally don't bother to switch as they think that if they do it once the deal they get will no longer be the best.  So they will be in a continual cycle of having the hassle of switching.

Savings as a service should improve the quality of earnings for Gocompare as people will be automatically switched.  This is the case even if car insurance premiums are falling. A risk is that product providers move their prices in-line with each other in reaction to this and switching therefore becomes less compelling.

Additional acquisitions will serve to diversify Gocompare away from car insurance switching and should strengthen the core business.  While they are likely to be debt financed the group is cash generative and is able to pay down debt relatively quickly.

I am not sure there are any other companies with £GOCO's return on capital and operating margins that are trading at a lower P/E ratio.  This reflects the cyclicality of the core car insurance switching business and an unclear growth/competitive outlook.  

The price comparison sector itself is also somewhat unpredictable.  The whole premise of the sector is that people will have to switch to get better deals i.e. to stop being ripped off.  If this premise were to disappear then the ability of the price comparison sector to perform may also disappear i.e. if insurance companies stopped offer renewing customers worse deals.  So it is probably important to recognise that this may not be the best sector to invest in.  

However, if Gocompare.Com (LON:GOCO) can at least maintain its competitive position then it should do ok over the long-term.  Price comparison websites and switching will be here to stay if the behaviour of product providers doesn't change.  But I'd welcome any thoughts/feedback to the contrary.  

Myvouchercodes and Energylinx have clearly improved the competitive position of Gocompare.Com (LON:GOCO).  This was evident in the impact of the rewards offers on the appeal of the Gocompare brand for consumers in Q2 2018.  Although I am not sure if the 2 for 1 restaurant deal was driven by Myvouchercodes business relationships or was a separate deal.  It came about as a result of a new commercial partnership with Dine Club.  

The group stated alongside 2017 results that: 

"MyVoucherCodes' strong position in retail vouchers is highly complementary to GoCompare's position as a leading provider of financial services and utilities comparison. GoCompare believes the acquisition will increase the opportunities for frequency of engagement with savvy savers who use both comparison and voucher websites, introduce offers to incentivise conversion on both GoCompare and MyVoucherCodes, and provide a new channel for existing GoCompare partners."

The Gocompare.Com (LON:GOCO) share price is, however, likely to be volatile given the cyclical nature of switching and the difficulty of assessing the competitive position of the group over time.  I think it is worth giving management their dues for H1 2018.  Any business can grow revenue by investing or in the case of Gocompare.Com (LON:GOCO) by spending on marketing etc.  It is much harder to improve margins and the group saw the operating profit margin increase significantly in H1 2018 to 27.7% from 23% a year ago.

It may be the case that the two businesses bought in H1 2018 help drive revenue growth for the core switching business in H2 2018.  At the very least, they should benefit the core switching business over the long-term.  That is unless the pesky Meerkats and the other two brands in the sector prove to be overly formidable as competitors.

The shares are off 12% since the announcement of first half results despite the group maintaining its forecast for full year profit.  So the forecast rating for this year has fallen back with investors clearly focusing on the slowdown in the core switching business.



The potential M&A angle is also interesting with ZPG previously having made two cash offers at 110p a share (in 2017).  ZPG has itself been taken over and they new owners may look to acquire Gocompare.Com (LON:GOCO).  The takeover multiple for ZPG was around 29X forecast earnings for 2018 while Gocompare.Com (LON:GOCO) current trades at 14.4X forecast earnings for 2018 i.e. it is trading at half ZPG's takeover multiple.  (This is without normalising the P/E ratios of both companies). If it was logical for ZPG to takeover Gocompare.Com (LON:GOCO) then presumably it is logical for the new owner of ZPG to takeover Gocompare.Com (LON:GOCO).

Rewards/Myvouchercodes deal

- H1 2018 results show that Rewards earned a trading profit of £2.4m.  So if we annualize this the figure is £4.8m and this compares to the acquisition price for Myvouchercodes of £36.5m.  So on face value the acquisition is a good one from a financial perspective.  However, it isn't clear what the administration costs for this segment are.  Admin costs for Gocompare.Com (LON:GOCO) increased by £2m in H1 2018 versus H1 2017.  If this was entirely due to the Myvouchercodecodes transaction then the acquisition price would be very steep.


- This £10m deal is hard to call.  However, it is interesting to note that they have already integrated it into Gocompare's energy journey for customers (from 16 July 2018).  If it increases the customer appeal of £GOCO's core business then it is worthwhile. 

Adjusted and reported earnings

- I haven't unpicked this but basic EPS at 3.1p isn't too different from adjusted EPS at 3.8p.  The adjustments look ok to me (adding back amortisation of acquired intangibles, transaction costs, other exceptional corporate costs).  The only issue is adding back Foundation Award share-based payment charges at £0.9m which is a real business cost.

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Mike888 5th Aug '18 10 of 17

In reply to post #387909

Hi Andrew, yes spiked earnings growth, a deviation from the norm, can be caused by many things and a read of recent RNS usually provides sufficient information for a stock I am not already close to. And yes given how PEG's are calculated this would cause an erroneous metric. Slater used a dozen or so considerations to help with this, some of which cannot be screened for.

My point, however, was more to do with Yr2 forecasts not being a particularly robust metric, specifically given that most stocks will show a lower earnings growth in yr2 than yr1, at least in my experience, and until a point in time whereby Yr2 becomes closer and\or new news drives meaningful forecast change into that year.

For me at least I find Yr2 data of less interest unless I'm seeing a dramatic fall in earnings or equally a dramatic increase in earnings, then I take it into consideration and that invariably means understanding what has driven it.


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Andrew L 5th Aug '18 11 of 17

In reply to post #388219

Thanks Mike.

Good point on Yr2 forecasts. The further out the less reliable. I think you are referring to the tendency of analysts to be conservative such as for Games Workshop (LON:GAW). The degree you can factor in year 2 forecast, in my view, depends on the scope that a business is predictable in nature.

I guess the only thing you can say is that if Yr1 forecast growth has been driven by one-off factors (M&A, higher margins) then Yr 2 growth forecasts will most likely be lower. I.e. Yr1 earnings growth forecast is 40% but Yr2 is 10% then clearly Yr1 forecast could have been driven by one-off factors. We can then check if this is the case. Analysts can easily model the impact of any one-off boost to earnings in year one and year two. This is the case I guess with Gocompare.Com (LON:GOCO) where they have modelled the impact of recent acquisitions on growth in 2018, but then the impact of these falls away in 2019. But I agree that earnings forecasts further out are less reliable.

I like the aim of Slater's screen and the PEG etc. And the statistics also show that it seems to work. However, I think it will tend to miss out on attractive secular growth stories because their near-term P/E ratios will be too high. Companies often have cheap ratios of P/E to growth for a reason. Perhaps it could be homebuilders seeing a recovery in earnings. These stocks usually trade at low P/E's while recovery earnings growth is not long-term in nature (i.e. it is mainly margin driven).

The only company of the three that seems to capture the spirit of the Slater screen is S&U (LON:SUS). However, as a finance company the issue is whether you think it is worth the risk. Gearing is not high for a finance business but ROCE is comparatively modest (still very good for a finance business at 12.8%).

Thanks, Andrew

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Andrew L 7th Aug '18 12 of 17

Interview with S&U (LON:SUS) in case of interest. Gives some background to the company. Shares of used car finance market is 1% according to article.  Page 34 of PDF link:

Kind of stock that people may like but many will also reject out of hand.  Long-term track record is certainly good.  But lots of reasons to avoid consumer finance type companies.

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Andrew L 10th Aug '18 13 of 17

Just reading Keith Ashworth-Lord's book again: Invest in the Best. Well worth a read even if it isn't light reading. (Keith if you are reading this... you are welcome!!!)

The first few chapters are particularly compelling. Basically growth is best with a high ROCE as it leads to more free cashflow. The Slater screen only had a modest ROCE cut-off at 12%. Terry Smith's cut off is 15%.

But a 40% ROCE business with 5% growth may be better than a 15% ROCE business with 10% growth. The former doesn't have to invest much to achieve growth due to the high returns. The Slater screen doesn't really pick this up.

I would strongly recommend page 20 in Keith's book and also the table on page 31. On page 31 three companies produce the same growth. Sanford has an unchanged average return on capital, DeLand has an increasing return on capital that starts at 19.5% and Castlefield has an ROCE that increases from a very high level.

On the Slater screen they may all look the same but Castlefield generates much higher free cashflow for investors. Hope that makes sense as I had to read these chapters a few times to properly understand the concepts. 

Essentially it is saying the quality of growth is very important.  Platform businesses that can grow without much investment are therefore very powerful.

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Keith Clingan 3rd Aug 14 of 17

I have been a disciple of the the late Jim Slater for many years.  One of his most important criteria is relative strength over 1,3, and 12 months.  Few of your selections conform to this important factor.

I was previously a subscriber to Company REFS, which printe all of the important information on a company on one A4 sheet of paper.  

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InvestorJohn Sat 8:55am 15 of 17

In reply to post #500151

Did you find company refs useful Keith? I think they are quite expensive from memory...

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xcity Sat 12:32pm 16 of 17

When I was a professional I would only use my own EPS, cash flow etc figures. That meant I knew what the numbers meant, that they were meaningful and I could compare with confidence. Some had a fuzzy mark where the accounts still left some uncertainty. But that was when I had people working for me so that I could have figures for every company of interest.

I wouldn't rely on figures like these direct from the company, and neither would I rely on the figures as calculated by Stocko and equivalent.

I don't have to be interested in so many companies now, so I can do my own numbers for those.

I'd suggest that everyone using this type of methodology do their own before making buy/sell decisions. Stocko is fine for screening those you might consider. Adjustments are rife now; some are good, some are acceptable and others are highly problematic. At time Paul's columns are very informative for his comments on what he is looking for, and which adjustments he would make himself. Slater was an accountant; he liked going through accounts to dig up what no-one else could see - it's hard to follow his methodology faithfully without also following his own method of working.

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Edward Croft Sat 11:22pm 17 of 17

In reply to post #505561

Sadly - REFS has gone into administration.

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