Jim Slater is a legend of growth stock investing. His method for choosing companies is best explained in The Zulu Principle - perhaps the UK's first 'investment bestseller'.
The 11 criteria are listed below, with an indication of whether Slater regards them as mandatory, important or desirable. Their effectiveness in the current market has diminished, and Slater has modified his approach accordingly, but the criteria are well worth absorbing, even if you don't follow them to the letter.
| 1. A positive growth rate in earnings per share in at least four of the last five years Look for steady growth of at least 15% per annum. Eliminate cyclical stocks. A shorter record can be acceptable if there has been a recent sharp acceleration in earnings growth. | Mandatory |
| 2. A low P/E ratio relative to the growth rate | Mandatory |
| 3. The chairman's statement in the report and accounts must be optimistic | Mandatory |
| 4. Strong liquidity, low borrowings and high cash flow Look for self-financing companies that generate cash. Avoid companies that are capital intensive and always requiring more money for new machinery. | Mandatory |
| 5. Competitive advantage The company must have an advantage over its competitors, whether a well-known brand, market dominance or a strong position in a niche business. | Mandatory |
| 6. Something new The shares must have a story. It could be a recent change in the structure of its industry (e.g. exit of a major player), new technology, a new chief executive - something that gives the market a reason to expect substantial increase in future earnings and forms the basis of the story on which the shares will be bought. | Important |
| 7. A small market capitalisation In the region of £10m to £50m with an upper limit of £100m. | Important |
| 8. High relative strength of the shares compared with the market | Important |
| 9. Dividend yield Ideally a steadily increasing dividend growing in line with earnings, but note that with a growth company dividends are not really the point: if a company can employ capital at 20% per annum, you really are much better off if it retains the profits. Nevertheless, a reduction in a company's dividend is a major event, with serious implications for the share price. Sell at the first sign that a dividend is under threat. | Desirable |
| 10. A reasonable asset position When investing in growth shares, assets are of limited importance. With a super-growth stock, at a certain point, tangible assets become almost irrelevant. | Desirable |
| 11. Management should have a significant shareholding Directors should own enough shares to give them 'the owner's eye' but not so many that they have control, can sit back and at some future stage block a bid. It is best if a good cross-section of directors, including the finance director, have reasonable shareholdings. | Desirable |
Jim Slater
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