10 great stocks that meet Jim Slater's Zulu strategy rules

zulu-dancing

While the UK is one of the world's major financial centres, it's fair to say we're a bit short of home-grown stock pickers that really capture the imagination of the investing public.

One of the few characters to manage it was the late Jim Slater. In his lifetime he went from City dealmaker to investing guru - and the growth strategy he used still reaps impressive returns.

In 1992, Slater wrote what's seen by many as a rulebook for finding great growth shares at reasonable prices. The Zulu Principle became popular because Slater offered a compelling case for growth investing, but also clearly understood the challenges faced by many private investors.

The book was inspired and partly researched by Slater's son, Mark, who still uses his father's Zulu principles at his fund management firm, Slater Investments.

SMALL, PROFITABLE STOCKS

Central to Slater's growth strategy is a focus on investing in companies that are poised to deliver impressive earnings growth, but can still be bought at a reasonable price. These are typically small, profitable stocks with robust cashflows, low debt and share prices that are already rising.

Slater was keen to find firms with strong competitive advantages, offering new products or services that were steered by effective and enthusiastic management.

One of his most distinctive tools for picking these Zulu shares is something called the price/earnings growth factor, or PEG. He saw this as a crucial measure of whether a stock offered an attractive trade-off between price and growth.

The PEG is worked out by dividing forecast price/earnings ratio (PE) by the expected rate of earnings-per-share growth (G).

As Slater 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 per cent would have a PEG of 0.8.

A strategy that models Slater's rules has generated a 26 per cent return over the past year, and 62 per cent over two years, easily outpacing the market.

With those rules in mind, we've created a list of stocks that currently fit with Slater's strategy. Among the rules, companies need to have a PEG below 1.0, a PE ratio below 20, a return-on-capital-employed greater than 12 per cent and earnings that are expected to grow by at least 15 per cent.

Importantly, the shares also need to have positive relative strength against the market over the past year.

ShareMkt Cap (£m)Forecast p/e ratioPEG SlaterForecast EPS growth (%)Roce (%)1yr relative strengthSector
Telit Communications373.913.00.1678.813.4+20.5Technology
Empresaria67.69.660.2637.312.8+30.7Industrials
Liontrust Asset Management177.310.80.2937.432.9+24.0Financials
Inspired Energy86.212.80.5821.916.6+5.92Industrials
Elecosoft28.117.30.6227.912.1+39.8Consumer cyclicals
Idox28515.80.6325.014.6+17.7Technology
Impax Asset Management91.714.80.7819.114.1+46.6Financials
Renew Holdings313.715.10.8118.760.2+2.70Industrials
Treatt174.218.90.9021.016.6+64.2Consumer defensives
Adept Telecom79.914.20.9215.314.7+19.7Telecoms

Topping this Slater-inspired list is Telit Communications, a specialist in communications and navigation systems, which has seen very strong performance in its shares recently. That's followed by recruitment firm Empresaria, and fund manager Liontrust.

Among the others are a number that have long fitted the kind of growth profile that the Zulu strategy looks for. They include software group Idox, Impax Asset Management, engineering contractor Renew Holdings, flavour and fragrance manufacturer Treatt, and Adept Telecom.

Over the past two years, a Slater-inspired focus on earnings growth in smaller stocks with reasonable prices, has been a very powerful approach to the market.

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 periods of market uncertainty 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 investors.

Ben Hobson is investment strategies editor at Stockopedia.com, the rules-based stock market investing website. He is also the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook". Click here to enjoy a completely FREE 5-day trial of Stockopedia.

interactive-investor-logo-small-sizeThis article was originally published on our sister website Interactive Investor.


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