Jim Slater's Zulu Principle for finding growth stock winners
14th January 2015 14:03
Ben Hobson from Stockopedia
There are very few investing greats with the enduring appeal of Jim Slater. A former City dealmaker turned stockmarket investor, Slater's knack for picking growth stocks has earned him a legion of followers over many years.
Back in 1992 he wrote what's regarded by many as a rulebook for finding great growth shares at reasonable prices. The Zulu Principle rose in popularity not just because of Slater's compelling approach to finding growth stars but also his empathy for private investors and the challenges they face.
Growth at a reasonable price
The book was inspired and partly researched by Slater's son, Mark, who has since applied his father's Zulu principles at Slater Investments and especially in the successful . In fact, that fund has returned 66% over the past three years, according to Trustnet.
Slater was keen to find firms with strong competitive advantages, offering new products or services that were steered by effective and enthusiastic management.
Slater's PEG ratio
One of his most distinctive tools for picking these Zulu shares is something called the price-earnings growth factor, or PEG. This he saw as a crucial measure of whether a stock offered an attractive trade-off between price and growth. It is calculated by dividing forecast price-to-earnings ratio (PE) by the expected rate of earnings-per-share growth (G). As he saw it, stocks with a PEG of less than 1 had higher growth rates than their PE ratios and were thus "cheap for their growth". For instance, a stock on a forecast PE of 20 but expected to grow at 25% would have a PEG of 0.8.
Zulu Principle performance history
At Stockopedia.com we've constructed a core set of stock screening rules based on Slater's Zulu Principle in order to track the strategy performance. The strategy has returned 43.7% over the past two years making it one of the top performing growth strategies on the website. That compares favourably against a reasonable benchmark like the FTSE SmallCap XIT, which is up by 27.9% over the same period.
Current Zulu Principle candidates
Until this week was a candidate on the UK stock screen. Slater has previously written this stock up as one of his top picks in the UK market. There are currently 10 candidates on the UK version of this stock screen including electronics manufacturer , communications services firm and wireless tech company . The full list can be found at Stockopedia.com.
Slater recently wrote in the Telegraph about the attraction of investing in the United States. Using Stockopedia data, the Zulu rules highlight US-quoted shares including , which makes self-service retail machines, , which specialises in pre-paid payment cards, and OTC Markets, the over-the-counter securities market operator.
Being careful with forecasts
Slater's focus on small cap growth naturally came under pressure during 2014, when many smaller stocks were beaten back by cautious investors. Indeed, his reliance on forecast data when it comes to calculating the PEG can make the strategy susceptible in a downturn. So it requires careful handling when market sentiment is weak.
But good quality growth shares offer great potential for profitable returns and excitement for investors, and Slater's Zulu Principle has proved adept at finding them. Despite swinging markets over the past couple of years his stock picking rules have still managed to highlight a number of top performers. That effectiveness, and Slater's enduring appeal, will ensure that he remains a favourite amongst UK stock pickers.
About Stockopedia
Interactive Investor's Stock Screening series is written by Ed Page Croft of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.
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About the author
Ben Hobson is Strategies Editor at Stockopedia.com. His background is in business analysis and journalism.
Ben writes regularly on investment strategy performance and screening ideas for Stockopedia. He is the author of several ebooks including "How to Make Money in Value Stocks"
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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