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Jim Slater: Zulus, PEGs and REFS

By Maynard Paton (TMFMayn)
April 19, 2002

Today's Fool's Eye View completes a short series highlighting the techniques of great investors. Past articles have reviewed the stock market thoughts of Benjamin Graham, Philip Fisher, Warren Buffet and Peter Lynch. Today we look at Jim Slater.

Jim Slater is probably the UK's most well known private investor. Published in 1992, his book The Zulu Principle was the first that presented British investors with a specific stock market strategy. Alongside refinements published in the follow-up Beyond The Zulu Principle, Slater also devised Really Essential Financial Statistics (REFS), a publication that helps investors locate suitable investment opportunities.


A qualified chartered accountant, Slater first came to prominence in the early 1960s. With Nigel Lawson as City editor, Slater wrote a column in the Sunday Telegraph under the pseudonym 'Capitalist'. Between 1963 and 1965, the Capitalist portfolio increased by 68.9%. Over the same time, the UK stock market rose by just 3.6%. The stock picking strategy used in the newspaper column subsequently formed the basis of the Zulu books.

Around the same time he started the newspaper portfolio, Slater also launched Slater Walker, an investment partnership that adopted a growth-by-acquisition strategy. Alongside the likes of Jimmy Goldsmith and James Hanson, the late 1960s saw Slater become one the stock market's pre-eminent 'asset-strippers'. But as with most stock market shooting stars, the frantic wheeling and dealing eventually took its toll. With a focus on banking and investment activities, the Slater Walker conglomerate finally collapsed during the financial crisis of 1974. For a time at least, Slater was a "minus millionaire".


Underpinned by his 'Capitalist' success, Slater's favoured type of investment became the small, fast growing and underrated company. Taken from his second Zulu book, the criteria he used to find such shares are listed below:

* A PEG with a relatively low cut-off such as 0.75;
* A prospective price to earnings (P/E) ratio of not more than 20. The preferred range for a P/E is 10-20 with forecast growth rates of 15-30%;
* Cash flow per share in excess of earnings per share (EPS), both for the last reported year and for the five-year average;
* Positive cash or gearing below 50%;
* High relative strength for the previous twelve months;
* A competitive advantage, which will be usually evidenced by a high return on capital employed (ROCE) and good operating margins, and;
* No selling of shares by a cluster of directors.

Highly desirable
* Accelerating EPS, especially if it is a result of activities being cloned;
* A cluster of directors buying shares;
* A small market capitalisation in the 30m-250m range, and;
* A dividend yield.

* A low price to sales ratio (PSR);
* Something new;
* A low price to research ratio (PRR), and;
* A reasonable asset position.

Slater's liking for smaller companies was based on a greater chance of finding a hidden gem: "Investment is essentially the arbitrage of ignorance. The successful investor believes he knows something that other investors do not fully appreciate. There is very little that is unknown about leading stocks. In contrast...most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain (with some ignorance to arbitrage) in this relatively under-exploited area of the stock market".

Slater also highlighted the greater potential for earnings growth at smaller companies: "I once compared a very large company with an elephant by making the comment "Elephants don't gallop" ".

But out of all his criteria, the Price Earnings Growth ratio (or PEG) is by far the most famous.

To recap, the PEG is calculated by dividing a company's prospective P/E ratio by its estimated future growth rate. Companies with a PEG of well under one, as Slater writes, "are usually worth examining in much more detail with a view to a purchase". However, shares with PEGs of over one "tend to be unappealing". The theory goes that shares with PEGs below one have a greater chance of an upward P/E re-rating (and commensurate price rise) should the forecast earnings growth materialise.

Unlike most other investment authors, Slater commendably included topical examples in his books. Of course, such transparency does open the door for criticism. And reviewing his selections six years on does make for slightly uncomfortable reading. In retrospect, part of the problem appears to stem from this remark:

"If a share fulfils all of my other criteria except competitive advantage, I usually soon realise that the company must have an advantage that I have failed to identify".

The problem was that some companies selected by Slater operated in fields (such as IT) that were growing so rapidly that competition didn't initially prove a problem. But when the competition caught up, the failure to determine what the company's competitive advantage was proved costly. You see, some companies didn't actually have one...


The straightforward Zulu strategy attracted many devotees during the mid-1990s. The following was undoubtedly enhanced by Slater's Company REFS product. Containing various statistics for every London-listed share, this publication was developed to help investors find suitable Zulu investments for themselves. But with everybody able to look for shares with the same criteria, a mini-Slater bubble occurred during 1998 and the winning strategy started to fade.

While Slater's stock market career has undoubtedly had its ups and downs, his Zulu books certainly acted as a catalyst to bring shares to a mass market UK audience. Indeed, over time, most private investors will probably remember Slater more for his hand in REFS rather than his Zulu strategy.

Although relatively expensive, REFS is by far the most informative, flexible and accurate stock-screening product on the market. Indeed, even without the filtering facilities, the ability to have REFS company data snapshots to hand is a great asset to most investors.