Jim Slater on Stock Screens

Jim Slater’s letter to Investors Chronicle and Algy Hall’s reply (14-20 August edition):

Jim Slater on Stock Screens

I was a little perturbed when I read your recent article (’15 Small-cap Slater picks’, 17 July, page 52).  In particular, the final portfolio of your Slater stock screen puzzled and worried me because it included only four shares that I might have regarded as possible candidates – Utilitywise, Solid State, First Derivatives and Cambria Auto.  I do not think that, in my final analysis, I would have included any of them in a portfolio for readers or for myself.

The probable reason for this is that, in these difficult markets with very low interest rates and high valuations, it is necessary to stretch the price-earnings to growth (PEG) limit to about 1.3 and, in that way, avoid losing some of the best shares.

For example, an excellent company on a forward multiple of 20, growing reliably at 15 per cent a year, would be very acceptable if it met the other criteria.  Once you stretch the PEG, to compensate you should be more demanding on the other criteria.  Strong cash flow well above earnings per share is one of my favourites and the absence of material directors selling is another.

The other matter that puzzled me was the tremendous contrast between the poor performance of your Slater stock screen last year and the results of my inheritance tax (IHT) portfolio in the Telegraph – Your Money.  Have a look at the results so far – a gain of 34 per cent over an average period of about nine months.  Prices were taken when I wrote this email on 23 July.  As you can see, all of the shares are comfortably well above my recommendation prices and, in my view, some of them are still buys.

In addition to the IHT portfolio, I have recommended in my column two other UK stocks – ITV at 203p (now 272p) and Bovis Homes in May at 932p (now 1,109p).

I have not worked out exactly what I am doing differently from your screen approach and why my performance is so much better.

I suggest that you have a look at my website – jimslater.org.uk – under Articles and Interviews.  You will see each recommendation and the then current statistics outlined in some detail.

I hasten to tell you that I am not criticising your approach.  I am genuinely interested in trying to pin down exactly how the substantial difference in performance has arisen.  Perhaps I am doing something extra in my own screening process instinctively without realising it.  My wife (of 50 years this September) tells me that it is ‘gut feel’.  I would be very interested to hear your views.

Jim Slater

Algy Hall replies:

This raises two very interesting points about the stock screening process.

The first is that the timing of a screen and data used are significant determinants of the stocks it suggests.  The data source I use provides average-next-two-financial-year EPS forecast rather than the next-12-months forecasts you use, which is likely to explain some of the differences.

Second, your letter highlights the role that the interpretation of a methodology can play in determining a screen’s results.  While rising market-wide valuations have caused you to adapt a method you have laid out in your excellent book, The Zulu Principle, by focusing more heavily on your ‘quality’ criteria and relaxing your ‘valuation’ requirement (the PEG of 1.3 times or less mentioned in your letter), I’ve tried to ope with prevailing market conditions by sticking doggedly with a PEG of 0.75 or less while relaxing the screen’s quality criteria.  As a consequence, the results from my ‘Slater-inspired’ screen have a more speculative flavour to them than the recent share recommendations in your Telegraph column.  There’s plenty of food for thought.