10 stocks for investors hunting growth at a reasonable price

Stockopedia's Ben Hobson reveals the great stocks currently passing Jim Slater's Zulu Principle rules.

Share prices have been in recovery mode over the past four months. After a savage slide on the UK market late last year, the bulls appear to be back in charge in 2019. When it comes to investment styles, some of the big early winners from this kind of change in sentiment are the growth strategies - and we’re starting to see the signs of that.

The bulls fend off the bears… for now

Last autumn's market dip had many of us wondering whether time was officially up for the long running momentum streak. But while the downswing was dramatic, the mood has turned much more upbeat in 2019.

The large-cap FTSE 100 index, for instance, is up by 10% since January. The FTSE 250 and the growth-focused AIM All-Share are both up by 13%. Setting the tone for all this - on the other side of the Atlantic - the US S&P 500 is once again troubling the record books as it stretches to new all-time highs.

Among the top UK performers over the past six months, the biggest gains across the FTSE 350 have been in stocks like Ocado (LSE:OCDO), Micro Focus International (LSE:MCRO) and Greggs (LSE:GRG). On main AIM board, the big winners have been the likes of ReNeuron (LSE:RENE) and Earthport (LSE:EPO) (on a takeover approach from Visa). And on the AIM 100, the leaders have been AB Dynamics (LSE:ABDP) and the relatively newly-listed Codemasters (LSE:CDM).

Swings in sentiment boost growth strategies

Late last year it was clear that the negative market momentum was causing problems for some of the most popular growth stock strategies. When confidence wanes, growth stocks are often the first to sell-off as investors opt for safer territory. So in the final three months of the year, growth and momentum strategies were among the biggest losers.

An additional challenge for growth strategies in bearish conditions is that they often struggle to find buying options. Typically, most of these approaches will look for some variation of earnings growth, quality and price strength in the shares they target. So in falling markets, negative market momentum can result in very few shares passing their rules. 

So it was pretty bleak for growth investors for a time in early 2019. Yet one of the boons of a pull back in prices is that strategies which buy growth at a reasonable price (GARP) can be very well positioned when markets bounce back. With momentum building, GARP has been back in business in 2019, and that’s exactly what we’ve seen in approaches like the Jim Slater inspired Zulu Principle strategy.

This strategy is well loved in the growth investor community. Slater's GARP model, which incorporated his own version of the Price Earnings Growth measure - or PEG - is designed to find fast moving growth stocks.

Slater saw the PEG as a crucial measure of whether a stock offered an attractive trade off between price and growth. It is calculated by dividing forecast price-to-earnings ratio (PE) by the expected rate of earnings-per-share growth (G). As he saw it, stocks with a PEG of less than 1 had higher growth rates than their PE ratios and were thus ‘cheap for their growth’. For instance, a stock on a forecast PE of 20 but expected to grow at 25% would have a PEG of 0.8.

Earlier this year the strategy was on the ropes, with very few companies passing the rules. But we’re starting to see the numbers swell.

Here are some of the stocks currently passing those Zulu Principle rules:

Source: Stockopedia

A few of these names have been regulars in the portfolio over the past two years, such as Pelatro (LSE:PTRO), Macfarlane (LSE:MACF), Johnson Service (LSE:JSG) and Impax Asset Management (LSE:IPX). But we haven't seen these sorts of qualifying numbers for over 12 months. As the 1-year relative price strength of these firms has clawed its way back into positive territory, they’re passing all of the Slater rules. As a result we see new names like M&C Saatchi (LSE:SAA), SimplyBiz (LSE:SBIZ), Next Fifteen (LSE:NFC), Midwich (LSE:MIDW) and Belvoir Lettings (LSE:BLV).

While the market hasn't quite recovered the ground it lost last year, it's a relief that prices are once again trending upwards. For growth investors - some of which may have been shaken out of the market last year - positive momentum could mark an opportunity to buy back in at cheaper prices. These kinds of shares are some of the most sensitive to changing market sentiment - and right now it looks like they're starting to bounce back.

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