Mark Slater backs Growth Stocks.... at a Price

Most investors go to the Master Investor conference to come away with some stock ideas which is precisely why the best attended speech today was by Mark Slater. While some of the speakers at the show have mixed agendas, Slater is a classic growth company investor and speaks about his stock picks with the same integrity and assuredness as his famous father Jim. It’s a style that has made the pair strong favourites amongst private investors and while he couldn’t attend the show in person, his pre-recorded presentation didn’t disappoint.

The Slater family champion a set of strict growth investment criteria focused around the PEG ratio - the goal being to buy strong, cash generative growth companies at reasonable valuations. These criteria haven’t really changed since they were delineated in Jim Slater’s very popular book ‘The Zulu Principle’ in the early 1990s and both Slaters continue to preach from that script.

Mark actually helped his father research the Zulu Principle books and invests his extremely successful fund, MFM Slater Growth, very much according to that set of criteria. While he has been known to take advantage of special situations at opportunistic moments such as at the 2009 market lows he currently sees little value in asset plays or recovery situations in the current market, only highlighting 21st Century Group as detailed below. Today he’s focused on buying classic Zulu Principle growth stocks at reasonable valuations - a strategy that he’s shown in practice has a tremendous track record for market beating returns.

Market Outlook

Slater is not as worried about the market as he was a few months ago noting that all investors have been very focused on the big picture issues at large for some time. He maintains that equities are reasonable value and that they are ‘by far the most attractive asset class’. But he cautioned that with the ongoing deleveraging of the consumer and increased tax cost to society that investors have to remain cautious and avoid the worst impacted sectors.

Investment Process

He discussed his investment methodology which essentially boils down to a three step process.

• Quantitative Screening Screening the market with the now familiar set of criteria. A PEG < 1, consistent EPS Growth and Cashflow > EPS. Perhaps stemming from his practice of investing larger sums of money in an institutional setting, he is more cautious about using momentum and relative strength as a primary criteria and won’t chase momentum.
• Qualitative Factors With the stocks that result from that quantitative search, the team further filter the results based on more qualitative factors, such as whether the company trades in a strong industry or has a good niche competitive advantage. They avoid highly rated stocks on a PE > 20, avoid anything with poor trading results and avoid any industries that are suffering from material structural concerns - retail being a prime example.
• Portfolio Management Run your winners, and cut your losers - Slater is very comfortable with having concentrated positions in companies he likes. You have to back your best stocks. While an obvious investment maxim, it should be noted that in practice due to psychological and behavioural factors many investors often fall into the trap of doing precisely the reverse.

Stock Picks

It should be noted that Mark and Jim Slater have a terrific track record. Slater senior’s picks back at the Growth Company Investor show in September have performed admirably well and Mark Slaters MFM Slater Growth Trust is one of the best performing trusts in the past year. Here are my notes on his stock picks today.

Cape (LON:CIU) - While Cape has risen enormously from its bottom in 2009, its still only valued at 11 times earnings. With 15% eps growth likely for the next 5 years Slater quotes the management as saying that Cape is about to enjoy its ‘Golden Years’. In growth markets especially in the Pacific Rim and the UK government unlikely to ignore its nuclear decommissioning issues for long, Cape is well positioned. Cash generative and with debt all but paid down Slater named Cape as a top pick.

Entertainment One (LON:ETO) - Renowned as owning the commercial rights for Peppa Pig and the teen vampire franchise Twilight, ETO’s stock has had a great run over the last year. Benefiting from being Canada domiciled and enjoying a kind tax environment, the company is ‘well run with wonderful IP’. Peppa Pig is essentially a children’s phenomenon and ETO has recently done a deal with the US giant kids TV channel Nickelodeon to run the show on PrimeTime for the next 3 years. This is a fantastic launchpad for Peppa into the US market and Slater says the brokers have nothing for this deal in broker forecasts which anticipate 15% eps growth. He sees 30-50% as being more likely and thinks its cheap on a multiple of 11-12 times earnings.

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Andor Technology (LON:AND) - High Spec cameras for the scientific markets, Andor was well highlighted by Jim Slater last September at the Growth Company Investor show. ‘Phenomenal track record’ of growing turnover on a 30% CAGR with new products and low forecasts, Slater sees the PE falling from 20 now to 14 times next year. He likes its ‘nichey’, cash generative business model.

Dialight (LON:DIA)  -  LED Products that Slater says benefit from being both green and saving customers money. The company has great operational gearing and he expects 25% p.a. growth for the next 5 years.

Oxford Instruments (LON:OXIG)  - Again, in a similar vein to Andor, he likes the model and picks it on a 17/18x PER.

21st Century - The only stock that Slater picked in the context of special situations rather than growth. He picked 21st Century as a £10m cap trading on a PER of 10 with lots of cash and property on the balance sheet being ignored by the market and £18m of revenue to boot.

All in all Slater gave the audience great value.