Jim Slater – stock market legend

Legendary investor Jim Slater explains that his success is due to a disciplined approach and sticking to principles. Miles Nolan explores the methods he uses

Over a successful career that has spanned many decades, well-known investor Jim Slater has had his fair share of adventures. We meet at his office on Davies Street, appropriately located in Mayfair – home to the second-largest hedge fund centre in the world and more than £200 billion of assets under management.

He breezes into his office on the first floor dressed smartly and with the energy of a man many years his junior. At ‘not far off 82’ he is as bright as a button and quick to rattle off calculations, facts and statistics. Slater first trained as an accountant, a profession that has certainly stood him in good stead for his career.

However, it was when he was aged 32 that his interest in the stock market was cemented after contracting a serious illness in Spain. With the concern of not being able to work, he purchased two years of back copies of Investors Chronicle and the Stock Exchange Gazette and read them from cover to cover. A key point he noticed was that shares that enjoyed a rising trend in earnings and also traded on a low price-to-earnings multiple tended to massively outperform the wider market.

It was this that formed the basis of a well-received monthly article under the nom de plume ‘The Capitalist’ for The Sunday Telegraph. To prove that this was no flash in the pan he went on to pen a column for The Mail on Sunday in which his recommendations surged by an average of 85 per cent.

Slater then founded the controversial Slater Walker Securities, best known for its asset-stripping practices. After the secondary banking crisis sealed its fate in 1975 he defined himself as a ‘minus millionaire’, though he never actually filed for bankruptcy and paid off all his debts a few years later. His interests then went on to include property investment, teaming up with Roland ‘Tiny’ Rowland of Lonrho fame, and he later went into salmon fishing. Another foray was into gold, setting up Galahad Gold with long-trusted colleague Ian Watson. The Galahad assets were ultimately sold off, leaving investors with an impressive gain.

So what is the magic of Slater, and how can we learn from his vast years of investment experience?

Guiding principles
Investing in smaller companies is key to his investment success – a well-known aphorism that he coined is ‘elephants don’t gallop’. Minnows have far more opportunity to double, treble or increase in value even more than their larger counterparts. Access to management is also likely to be slightly easier than tracking down the heads of FTSE 100 companies.

A point that Slater hammers home religiously is that above all else it’s ‘the method that matters’. He likes stocks that trade on an attractively low P/E, so he is not interested in those that sell for, say, over 25 times earnings as there is little margin for error.

Earnings per share growth should be high relative to the P/E so, for example, a company growing its earnings at 20 per cent a year and trading on ten times earnings will attract a PEG (price/earnings to growth) ratio of 0.5. Less than one is attractive, and it is this methodology that helped Slater devise the Company REFS (Really Essential Financial Statistics) stock selection tool in 1993.

When investing, it’s important to look at the downside, so to avoid any ‘Enron-type disasters’ pay careful attention to the cash flow generated by a company – the cash flow per share should preferably exceed earnings per share. This gives a valuable buffer and helps pave the way for expansion and pay down debts. A company should ideally have four years of successive EPS growth; this could be past or future or a combination of both. Following Slater’s ideas ‘provides safety and also helps power the upside’.

The strength of a share price relative to the market and its sector is another key indicator – if weak it’s best to look elsewhere. Director buying (particularly in clusters) is a good sign but Slater is ‘turned off’ by directors selling. When spotting directors’ dealings pay particular attention to the decision-makers – the chairman, chief executive and finance director, for example, will carry more sway than a non-executive director. Also look at how much they are investing relative to existing holdings and their current salary.

With such a wide universe of stocks to choose from Slater sees no reason why one should take unnecessary risks beyond his core investment criteria. Ultimately, he argues that the two main things that will drive a share price are 1) increased earnings, and 2) an improvement in its P/E, in other words a rerating. Investors should seek the ‘double whammy’ of both. As Slater adds, ‘My game is not speculative – far from it.’

For further reading he recommends Interpreting Company Reports and Accounts by Geoffrey Holmes, What Works on Wall Street by James O’Shaughnessy and The Little Book of Sideways Markets by Vitaliy Katsenelson.

Stocks to watch
At our well-received Growth Company Investor Show last September, Slater highlighted a basket of four stocks to follow: Volex, Cape, Advanced Medical Solutions and Andor. By the middle of January his stock selections had soared by an average of 25 per cent, a situation that he argues is no coincidence.

His son Mark runs the MFM Slater Growth Fund and has been adopting these well-honed techniques – the fund was the top performer last year with a return of 76.7 per cent. In October 2009, after a restructuring, the fund focused much more heavily on small- and mid-cap growth stocks, having previously had a high weighting in FTSE 100 companies.

The fund has targeted stocks where analyst forecasts are deemed to be too low, so in turn upgrades and reratings have helped enormously. Stocks such as Judges Capital, Cape, Hutchison China and Meditech have all soared in value as the investment community has cottoned on to their merits. Many high-quality stocks such as Domino’s Pizza (28 times) and Oxford Instruments (17 times) are highly rated but remain attractive on the PEG basis. Mark Slater says that he sees ‘the best value in companies that trade on P/E’s in the ten to 14 range’. Emphasis is placed on those with excellent earnings visibility that trade strongly and operate in fast-growing markets and/or attractive niches.

Jim Slater tends to favour long-term growth stories that he finds early on. As the old adage goes, ‘any fool can buy’ but its when to sell that can prove tricky. Slater tends not to wait for the very last penny but sells when the rating has got to a level he feels is overcooked or the original factors for buying have lessened. One example is Education Development International. He spotted the company around the 40p a share level and sold at 150p when he felt that the new government might stifle its growth. Shortly afterwards, the shares fell to around 100p. One stock that proved a big disappointment was Healthcare Locums, but in this case he was quick to exit and would never advocate hanging on if the story has changed for the worse. Because his unit size can be quite large he has to sell when demand dictates. He says, ‘I like a stock to be enormously attractive when I buy and it needs to be pretty attractive when I sell.’

Themes for 2011
Jim Slater is struggling to find much value in the UK market at present. ‘The UK looks very expensive, with very few bargains around,’ he says. By contrast, he believes that China will keep growing but at a slower rate and that the US should have a good year.

He still likes Cape and gives a mention to Entertainment One, a film and television distributor that has done well from the likes of Peppa Pig and Twilight. The current rights library spans all media formats and includes more than 20,000 film and television titles, 2,400 hours of television programming and 45,000 music tracks. Despite the stellar share price performance over the past year, Slater feels that the stock has much further to run. Indeed, Peel Hunt expects EPS growth in 2011 of a robust 22 per cent. Other UK shares he likes include Mattioli Woods and 21st Century, and he has a substantial investment in his son Mark’s Slater Growth Fund.

Slater remains bullish on gold and can see the metal hitting $1,700 an ounce. His optimism is for three reasons. First is the advent of exchange-traded funds (ETF’s), which allow the ‘man in the street’ to invest in gold funds rather than directly via, say, gold coins. Another factor is that the Chinese government has been actively encouraging its population to buy gold, and the final reason is the strength of gold as a store of value when so many world currencies are ‘doubtful’.

He likes the ‘almost perfect storm’ that gold presents as central banks begin to buy and the public buy in their droves as supply declines. He feels that the infamous investor Warren Buffett, who he describes as ‘the master of investment’, is wrong on gold as during the past ten years it has outperformed him over six times. When asked to pick a stock, he favours Spanish Mountain Gold, a Vancouver-listed explorer with a measured and indicated resource of almost four million ounces in British Colombia.

Market-driven lifestyle
With a financial background that most people would be happy resting on, Jim Slater is very much driven by the market. He rises every morning at 7am and spends a typical day researching and following potential investments in what he sees as an ‘ongoing game’. With the US market opening at 2.30pm and closing at 9pm UK time, he then switches his attentions to Asia in the evening. He often ‘grudges the weekends’ as the markets are shut, but at least it allows him time to catch up with his four children and ten grandchildren.

Slater is also the co-founder of Agrifirma, a company focused on developing farms in Bahia in Brazil, an area with good soil that lends itself to the growing of corn, soybeans, coffee and cotton.

Slater can survive comfortably on six hours sleep, and when not seeking out the next stock winner he spends time on the Slater Foundation, of which he is chairman. This is a charity that has helped develop British chess champions and paid for tennis lessons with David Lloyd that helped further the career of 11 young tennis players including Tim Henman. Most recently, the charity has financed a young girl to attend a Russian ballet school.

For further information on Jim Slater, visit his website, www.jimslater.org.uk