Tip-top share advice off the PEG

The Investment Column

One of the enduring mysteries about investment in this country is that there are so few books to read on the subject. Go into any bookshop and you will be faced with hundreds of how-to guides on cookery, gardening, computing and any number of other hobbies. But for the serious investor, it is next to impossible to find a book not written by an American, for American readers and focused on Wall Street.

A notable exception to this rule in recent years has been Jim Slater, whose first book, The Zulu Principle, was at the time the only decent attempt to take a systematic look at what made for good investment. It was a welcome antidote to the amateurish dilettantism that has characterised share-tipping over here.

Since then he has also written an investment primer, Investment Made Easy, and a more advanced book on buying yield stocks, Pep Up Your Wealth, based on the thinking of the US investor Michael O'Higgins, who for years has championed the cause of out-of-favour, high-yielding stocks which both in the US and here have tended to outperform the market by a sizeable margin.

Anyone who has read these books will be interested in Mr Slater's latest book, due to be published in the autumn. Beyond The Zulu Principle, as its name suggests, takes the thinking in Mr Slater's first book further and attempts to develop nothing less ambitious than a share-selection technique that will consistently pick high-performance growth shares, the Holy Grail of investing.

Never one to miss a profitable opportunity, Mr Slater makes no bones about the fact that the book is also a tool to promote his proudest creation in recent years, a monthly statistical service called, with no lack of modesty, Really Essential Financial Statistics (Refs for short).

It is not a bad description of a product which many investors are finding to be the definitive investment tool. Coming in three volumes every month, Refs provides more than 2,000 pages of comprehensive statistical information on companies from the biggest FT-SE 100 stocks down to AIM tiddlers.

As well as a wealth of historic profit-and-loss and balance sheet information, each company's full-page entry shows a full list of individual brokers' forecasts, entries showing recent directors' dealings, news flow over the previous year, key dates and a sophisticated chart superimposing and comparing earnings per share and share price performance.

Refs' biggest advantage over other statistical services, however, is the fact that all the investment information such as price/earnings ratios and growth rates are calculated on a rolling 12-months-ahead basis that uses a pro rata proportion of the next two years' forecasts to get an accurate fix on the next year's statistics.

This is such a simple development that it is amazing no one else has done it already, but if you think about it, it is a minimum requirement for any sensible comparison of companies. Putting them on a wholly comparable footing means a volume of tables listing stocks in order of attractiveness according to various criteria can be created.

At a glance, investors can see which shares have the highest return on capital, which have the strongest cash flow, which have outperformed the market most over the past year, or which have the lowest ratings relative to prospective growth rates.

It is these last two nuggets of investment knowledge that form the basis of the argument laid out in Beyond The Zulu Principle. The basic approach Mr Slater now adopts in his share selection, and which he recommends in the book, is to buy shares that trade on a low p/e relative to their forecast growth but which have already started outperforming as the market wakes up to their attractions.

It is a simple enough method, made even more so by the tables in Refs which list companies that meet these two crucial criteria. But Mr Slater's extensive research over the past year or so suggests that it has also been highly effective (albeit only tested in a relatively buoyant market).

Between April 1995 and April this year, shares with p/e ratios of less than three-quarters their forecast growth rate over the coming year (with low Price Earnings Growth factors, or PEGs, according to Mr Slater's terminology) have outperformed the market by an impressive margin. Even among FT-SE 100 companies, where you would expect the market to be reasonably efficient, low PEG companies rose by an average of 21 per cent compared with a rise of 9.5 per cent for the index as a whole. The chart shows the detailed monthly performance.

At the smaller end of the market, where companies are less well researched, the effect is even more dramatic. The book charts the progress of a portfolio of shares, chosen on the basis of low PEG, strong cash flow and good relative strength, over the first six months of this year. The five stocks rose by 65 per cent on average compared with a 6 per cent rise in the All-Share index and a 14 per cent increase in the Small-Cap index.

It is early days yet to judge the effectiveness of the Slater technique, but the evidence so far is compelling. At pounds 675 a year for the monthly edition, or pounds 250 quarterly, however, Refs is plainly a sizeable investment in itself. But if you can replicate the performance of Mr Slater's portfolios the pay-back on even a fairly modest portfolio should be quite rapid.

For a group of investors, say an investment club, it would appear to be an essential tool. For anyone with even a passing interest in equity investment, the book is definitely worth a read.

'Beyond The Zulu Principle' will be published later this year by Orion.

Really Essential Financial Statistics is available from Hemmington Scott Publishing, tel: 0171-278 7769.