Mark Slater, one of the UK’s top performing growth investors, once said there’s “something comforting about owning really good quality businesses. The problem is they are rare and they are quite difficult to identify.” His record of superlative performance by funds he manages is a big endorsement of an investment strategy first conceived by his late father, Jim Slater, a legend among investors.
Jim Slater’s famous book, The Zulu Principle, which documented his stockpicking strategy, is a bible for growth investors across the world for decades now. Slater originally rose to prominence with a share column, “The Capitalist” in the Sunday Telegraph. In 1990 he published this book and called it the The Zulu Principle to illustrate the importance of specialisation, the key to his investment strategy – the name was triggered when his wife started to read up on Zulus and quickly became an expert.
How the Zulu strategy works
Slater was keen to find firms with strong competitive advantages, offering new products or services that were steered by effective and enthusiastic management.
Zulu Investing is a GARP (Growth at reasonable price) investing style which uses a combination of growth and value, looking for shares where brokers are forecasting high earnings growth, but which are currently valued at a price that is low relative to their forecast earnings. Slater’s preference was for typically small, profitable stocks with robust cash flows, low debt and share prices that are already rising, that is, in momentum.
“Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market”.
Zulu Strategy Essentials
- A low PEG (price-earnings ratio relative to the growth rate) below, 0.75. The PEG is worked out by dividing forecast price/earnings ratio (PE) by the expected rate of earnings-per-share growth (G).
- A prospective price-earnings ratio of not less than 20 – “the preferred range for a P/E is 10-20 with forecast growth rates of 15-30%”. He is wary where growth exceeds these levels, as that sort of growth rate is usually unsustainable
- Strong cash flow per share in excess of earnings per share (EPS), both for the last reported year and for the five-year average.
- Strong financial liquidity evidenced by positive cash or gearing below 50%, although exceptions are made where a stock is unusually cash generative or there are pending asset sales.
- High relative strength in the last one (or three) months and the previous twelve months compared with the market, with the 12 months being higher than the one month. A technical as opposed to a fundamental measure is used as a sign that investors are beginning to appreciate the company’s potential.
- A good competitive advantage, which will be usually evidenced by a high return on capital employed (ROCE, excluding intangibles above 12% and ideally in the region of 20%) and good operating margins relative to the industry (although recognising that exceptional margins may attract competitution).
- No selling of shares by a group of directors.
Zulu India !
While buying into a growth story at the right moment and at the right price is paramount, these are companies that an investor could conceivably keep in a portfolio for very many years.
A lot of screeners freely available on the web can be used by investors to catch stocks that may deliver excellent performance as per these criteria.
In fact, till the beginning of this year, India was one of the sharpest returns on the Zulu screens and has collapsed the most because of the carnage in the Small and Small Midcap segments.
You may see the performance of these screens at https://www.stockopedia.com/screens/jim-slater-zulu-principle-screen-19/ OR any of the screeners available which provide backtested results. Lots of these screeners allow you to modify your parameters or add several years of performance testing as well as current recommendations.
With markets possibly threatening to surprise on the upside, becoming a Zulu now may help your portfolio considerably!
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