What's Jim Slater's recipe for success?

Oct 25, 2006

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Jim Slater is probably Britain’s most famous private investor, says Fool.co.uk. He rose to prominence in the 1960s with a share-tipping column that focused on small, fast-growing and under¬rated firms – a bias that propelled his portfolio to a 70% gain between 1963 and 1965. The overall market rose just 3.6% over the same period. And this was no flash in the pan: Slater’s approach returned 24.5% a year between 1994 and 2004, while the overall market advanced by an annual 4.4%, notes Kathryn Cooper in The Sunday Times. So how does it work?

Jim Slater's strategy: find cheap growth stocks

lSlater concentrates on small firms as  “elephants don’t gallop” – big firms are unlikely to grow very fast. To find a cheap growth stock that should benefit from a rerating, investors should look at the price to earnings growth ratio (or PEG, available on www.digitallook.com or www.advfn.com). This is the forecast price/earnings ratio divided by the forecast earnings growth ratio. A PEG below one suggests a company’s growth prospects are undervalued, giving investors a “margin of safety”, Slater told Cooper. A PEG above one means the market is paying too much for future earnings growth.

Jim Slater's strategy: look at earnings growth

Firms must boast four successive years of earnings growth – Slater looks at both historic and forecast profits in this context – before they can be considered. If profit growth exceeds 25% a year, he is wary, as this sort of pace is often unsustainable.

Jim Slater's strategy: check for outperformance

Slater checks that the firm’s earnings are backed by solid cash flow and the shares have recently been performing better than the market, a sign that investors are beginning to appreciate their appeal.

Jim Slater's strategy: monitor directors' dealings

Another element of Slater’s strategy is checking on directors’ sales; if several are ditching shares, “I start to worry”. Let your profits run and ditch your losers at the first sign of trouble, says Slater – investors often do the opposite.

Slater’s current favourites in the UK include Goals Soccer Centres (GOAL), an operator of five-a-side football sites, and Accuma (ACG), which is cashing in on the debt boom. He is also a long-term commodity bull and is especially keen on uranium. Slater is deputy chairman of Aim-listed Galahad Gold (GLA) with a 10% stake, and holds shares in Toronto-listed SXR Uranium One (SXR).

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