Alphascreens: the Market According to GARP

24 June 2019 AlphaScreens: The market according to GARP

Growth at a reasonable price, or GARP, has proved a reliable strategy that has previously generated market-beating returns. We run our GARP screens across three indices: FTSE All-Share, All Small, and Aim

Neff 5-year cumulative total return Algy Hall’s view: 300 280 Neff uying shares that offer growth at a reasonable price (GARP) 260 can generate strong returns. Prominent exponents of this 240 220 style of investing include the likes of Jim Slater, Peter Lynch 200 B 180 and, arguably, also John Neff. A key metric to assess whether 160 companies offer the magic combination of value and growth is the 140 FTSE All-Share 120 price-to-earnings-growth (PEG) ratio. In its most basic form the 100 2013 2014 2015 2016 2017 ratio simply compares a share’s valuation against its earnings with Source: Thomson Datastream its earnings growth rate (historic or forecast). This approach is not overly exacting, but over many years it has proved a very effective way of identifying great investment opportunities when combined with other factors that suggest there are solid foundations to the value and growth measures used by the ratio.

n Yet again, recruiter Page Group (PAGE) is the only company with a market cap over £1bn that passes all eight of our FTSE All-Share GARP tests. n Packaging specialist Macfarlane (MACF) also scores 8/8 and as a smaller company (its market cap is £158m) it is also part of the FTSE Small Companies Index, which we screen against an amended seven-test criteria. Macfarlane also gets full marks on the small-cap screen. n Other companies that get 7/7 on the small-cap screen include alcoholic drinks business Stock Spirits (STCK), ten-pin bowling and family entertainment company Ten Entertainment Group (TEG) and student accommodation real estate investment trust (REIT) GCP Student Living (DIGS). n On Aim, there are three companies that pass all the small-cap tests including miners Atalaya Mining (ATYM) and Sylvania Platinum (SLP). The other company is none other than Simon Thompson Alpha pick Elektron Technology (EKT), which has seen price gains of over 40 per cent in the past three months. JN

Analyst: Algy Hall [email protected] Alpha Production Editor: Sameera Hai Baig www.investorschronicle.co.uk telephone: +44 (0)20 7873 3000 email: [email protected] © The Financial Times Limited 2018. Investors Chronicle is a trademark of The Financial Times Limited.

1 Large-cap GARP criteria Our large-cap GARP screen is run on all FTSE All-Share stocks and uses a PEG ratio based on the historic price/ earnings (PE) ratio divided by a combination of the earnings growth rate and dividend yield. The earnings growth rate is calculated based on the average of the five-year historic growth rate and the average forecast growth over the next two years. The screening criteria are:

n A PEG ratio below the median average. n A PE ratio that is higher than that of the lowest quarter of stocks screened (ie not suspiciously cheap) and below the top quarter (ie not dangerously expensive). n A five-year historic EPS compound annual growth rate above 7.5 per cent but below 20 per cent (ie high, but sustainably so). n A five-year historic revenue compound annual growth rate above 5 per cent (ie sales growth underpinning earnings growth). n Year-on-year EPS growth in each of the past two half- year periods. n Average forecast EPS growth of more than 7.5 per cent for the next two financial years. n Positive free cash flow in each of the past three years. n No downgrade to forecast EPS over the last three months.

Not many stocks pass such a stringent list of criteria. The ones that pass all the tests are listed at the top of the table at the top of page 4, followed by those failing one test, then those failing two tests and so on as detailed in the ‘Tests passed’ column. All stocks must pass the PEG test to feature in the table. While the primary ranking of the socks is based on the number of tests they pass, inside each of these groupings, stocks are ordered according to their attractiveness based on a combination of PEG and three-month price momentum.

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2 Small-cap GARP criteria Our small-cap GARP screen is run on all stocks in the FTSE All-Small and Alternative Investment Market (Aim) indices, with the results from the individual indices listed in separate tables. The screen uses a PEG based on the historic PE ratio and average forecast growth for the next two financial years. The screening criteria are:

n A PEG ratio in the bottom quarter of all stocks screened. n EPS growth forecast for each of the next two financial years and an average growth rate over the period of more than 10 per cent and less than 50 per cent (ie high, but sustainably so). n Either a return on equity of over 12.5 per cent or an operating margin of over 15 per cent (ie an indicator of a quality business that may have a sustainable advantage). n Either three-month share price momentum better than the median average or earnings upgrades of 10 per cent or more over the past three months (ie recent reasons to feel positive). n Operating cash conversion of 90 per cent or more. n Net debt of less than 1.5 times cash profits. n A market capitalisation of more than £10m (ie not severely illiquid).

Not many stocks pass such a stringent list of criteria. The ones that pass all the tests are listed at the top of the tables on page 5, followed by those failing one test, then those failing two tests and so on as detailed in the ‘Tests passed’ column. All stocks must pass the low PEG test to feature in the table. While the primary ranking of the socks is based on the number of tests they pass, inside each of these groupings, stocks are ordered according to their attractiveness based on a combination of PEG and three-month price momentum. Stock screen methodology formulated and explained by Algy Hall

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3 Large-cap GARP selection (passing at least 6 of 8 tests)

Mkt Fwd NTM Fwd EPS grth Fwd EPS grth 3-month Net cash/ T ests passed Test Name TIDM cap Price PE PEG DY FY+1 FY+2 momentum debt(-) Cur (out of 8) failed PageGroup LSE:PAGE £1,692m 533p 14 0.8 4.8% 13.6% 9.6% 12.8% 98m GBP 8 na Macfarlane LSE:MACF £158m 101p 13 0.9 2.3% 39.9% 1.8% 2.4% -13m GBP 8 na Unilever LSE:ULVR £128,225m 4,909p 21 1.1 2.8% 7.6% 8.5% 14.2% -20,688m EUR 7 /5yr Rev grth/ Huntsworth LSE:HNT £366m 100p 12 1.3 2.3% 22.0% 9.0% 15.5% -77m GBP 7 /5yr EPS grth/ Electrocomponents LSE:ECM £2,752m 621p 16 1.3 2.4% 7.5% 8.5% 10.7% -124m GBP 7 /HY EPS grth/ Polypipe LSE:PLP £870m 437p 14 1.1 2.7% 8.5% 6.3% 8.5% -165m GBP 7 /Fwd EPS/ Grafton LSE:GFTU £1,991m 838p 12 1.0 2.1% 0.6% 7.7% 5.5% -53m GBP 7 /Av FY2 Fwd EPS growth > 7.5% RHI Magnesita N.V. LSE:RHIM £2,268m 4,584p 8 0.9 2.9% 15.7% 4.3% 2.4% -646m EUR 7 /HY EPS grth/ Bovis Homes LSE:BVS £1,371m 1,020p 9 0.5 5.6% 6.7% 10.6% -7.2% 127m GBP 7 /Fwd EPS/ MJ Gleeson LSE:GLE £381m 698p 12 0.6 4.6% 8.8% 9.7% -14.9% 28m GBP 7 /5yr EPS grth/ S&U LSE:SUS £280m 2,320p 9 0.6 5.1% 7.0% 8.7% 28.9% -109m GBP 6 /FCF/Fwd EPS/ JD Sports Fashion LSE:JD. £5,680m 584p 18 0.9 0.3% 13.8% 9.9% 23.2% 125m GBP 6 /5yr EPS grth/FCF/ Ashtead LSE:AHT £10,057m 2,165p 11 0.6 1.8% 16.9% 8.2% 18.0% -3,745m GBP 6 /5yr EPS grth/HY EPS grth/ Speedy Hire LSE:SDY £338m 65p 12 0.5 3.1% 13.3% 9.5% 13.3% -90m GBP 6 /5yr EPS grth/5yr Rev grth/ Marshalls LSE:MSLH £1,353m 682p 24 1.2 1.8% 8.9% 6.4% 13.9% -37m GBP 6 /mid PE/5yr EPS grth/ 4imprint LSE:FOUR £748m 2,670p 23 1.2 2.1% 13.6% 11.0% 11.3% 27m USD 6 /mid PE/5yr EPS grth/ Computacenter LSE:CCC £1,454m 1,289p 16 1.2 2.4% 5.9% 3.5% 10.7% 57m GBP 6 /5yr EPS grth/Av FY2 Fwd EPS growth > 7.5% SThree LSE:STHR £392m 303p 9 0.4 4.8% 11.3% 7.2% 7.1% -4m GBP 6 /5yr EPS grth/HY EPS grth/ Robert Walters LSE:RWA £471m 658p 13 0.5 2.2% 10.0% 7.8% 6.1% 74m GBP 6 /5yr EPS grth/Fwd EPS/ The Unite Group LSE:UTG £2,552m 967p 25 0.7 3.0% 13.3% 8.6% 6.6% -469m GBP 6 /HY EPS grth/Fwd EPS/ Primary Health Props LSE:PHP £1,504m 132p 23 1.0 4.2% 9.1% 6.4% 3.7% -688m GBP 6 /HY EPS grth/Fwd EPS/ Howden Joinery LSE:HWDN £3,017m 503p 15 1.2 2.3% 5.5% 7.9% 3.9% 231m GBP 6 /Av FY2 Fwd EPS growth > 7.5%Fwd EPS/ RPC LSE:RPC £3,212m 792p 11 0.7 3.5% 3.0% 5.9% 0.0% -1,195m GBP 6 /5yr EPS grth/Av FY2 Fwd EPS growth > 7.5% SSP LSE:SSPG £2,961m 670p 22 0.2 6.6% 9.1% 9.5% -6.2% -438m GBP 6 /mid PE/5yr EPS grth/ Shaftesbury LSE:SHB £2,511m 819p 42 -2.8 2.1% 7.3% 9.6% -8.1% -838m GBP 6 /5yr EPS grth/HY EPS grth/ Synthomer LSE:SYNT £1,278m 376p 11 0.9 3.5% 7.6% 3.3% -3.8% -219m GBP 6 /HY EPS grth/Av FY2 Fwd EPS growth > 7.5% McColl’s Retail LSE:MCLS £73m 64p 8 0.9 6.3% 25.1% 0.1% -6.1% -99m GBP 6 /5yr EPS grth/HY EPS grth/ Cineworld LSE:CINE £3,493m 255p 10 1.0 4.6% 24.5% 4.9% -14.9% -3,733m USD 6 /5yr EPS grth/HY EPS grth/ Imperial Brands LSE:IMB £17,733m 1,870p 7 0.6 10.0% 3.7% 3.2% -28.2% -12,807m GBP 6 /Av FY2 Fwd EPS growth > 7.5%5yr Rev grth/ Source: S&P CapitalIQ, as at 24 Jun 2019

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4 Small-cap GARP selection (passing at least 5 of 7 tests) Mkt Fwd NTM Fwd EPS grth Fwd EPS grth 3-month Net cash/ Tests passed Test Name TIDM cap Price PE PEG DY FY+1 FY+2 momentum debt(-) Cur (out of 7) failed Stock Spirits LSE:STCK £424m 214p 13 1.20 3.6% 21.5% 7.8% -2.0% -25m EUR 7 na Macfarlane LSE:MACF £158m 101p 13 0.86 2.3% 39.9% 1.8% 2.4% -13m GBP 7 na Ten Entertainment LSE:TEG £149m 229p 11 0.89 4.8% 26.1% 11.9% 4.1% -11m GBP 7 na GCP Student Living LSE:DIGS £683m 165p 32 0.42 3.7% 29.7% 15.4% 7.6% -212m GBP 7 na Capital Drilling LSE:CAPD £66m 49p 9 0.67 3.4% 22.4% 8.4% -3.3% 17m USD 6 /Hi RoE or Marg/ SOCO International LSE:SIA £261m 66p 17 0.55 8.3% 31.9% 9.1% -1.7% 145m USD 6 /Mom or Upgrade/ Residential Secure Income LSE:RESI £162m 95p 27 0.12 5.3% 222.6% -2.4% 4.0% -67m GBP 6 /Fwd EPS grth/ TClarke LSE:CTO £50m 116p 7 0.70 3.4% 16.8% 5.1% 11.7% 12m GBP 6 /Cash Conv/ Gem Diamonds LSE:GEMD £110m 79p 6 0.56 - -15.0% 40.7% -16.5% 17m USD 5 /Fwd EPS grth/Mom or Upgrade/ Kenmare Resources LSE:KMR £196m 179p 5 0.66 - 4.6% 10.0% -7.2% 14m USD 5 /Fwd EPS grth/Mom or Upgrade/ Empiric Student Property LSE:ESP £554m 92p 21 0.56 5.4% 36.9% 9.1% 0.0% -301m GBP 5 /Mom or Upgrade/Debt/ Regional REIT LSE:RGL £404m 108p 13 0.78 7.4% 13.3% 1.8% 4.5% -270m GBP 5 /Fwd EPS grth/Cash Conv/ UP Global Sourcing LSE:UPGS £68m 86p 12 0.88 3.2% 33.3% 3.0% 38.0% -14m GBP 5 /Cash Conv/Debt/ Source: S&P CapitalIQ, as at 24 Jun 2019

Aim GARP selection (passing at least 5 of 7 tests) Mkt Fwd NTM Fwd EPS grth Fwd EPS grth 3-month Net cash/ Tests passed Test Name TIDM cap Price PE PEG DY FY+1 FY+2 momentum debt(-) Cur (out of 7) failed Atalaya Mining AIM:ATYM £280m 204p 7 0.25 - 16.8% 47.2% -13.1% 24m EUR 7 na Sylvania Platinum AIM:SLP £82m 29p 6 0.24 1.2% 72.8% 5.8% 4.7% 20m USD 7 na Elektron Technology AIM:EKT £93m 53p 18 0.75 - 43.2% 18.9% 43.8% 10m GBP 7 na Staffline AIM:STAF £27m 100p 1 0.27 26.8% 0.5% 10.1% -88.8% -37m GBP 6 /Fwd EPS grth/ Central Asia Metals AIM:CAML £377m 220p 8 0.61 6.6% 8.7% 19.5% -9.6% -110m USD 6 /Mom or Upgrade/ Dart AIM:DTG £1,251m 841p 9 0.76 0.9% 51.8% -14.4% 3.4% 460m GBP 6 /Fwd EPS grth/ Swallowfield AIM:SWL £33m 193p 8 0.86 3.2% 15.9% 5.3% 4.1% -2m GBP 6 /Hi RoE or Marg/ Universe Group AIM:UNG £13m 5p 13 0.67 - 21.2% 20.6% 5.7% 2m GBP 6 /Hi RoE or Marg/ Caledonia Mining Corp AIM:CMCL £84m 445p - 0.00 - -42.7% 19.1% 7.1% 8m USD 6 /Fwd EPS grth/ Concurrent Technologies AIM:CNC £54m 75p 12 0.72 3.1% 56.9% -4.1% 10.4% 8m GBP 6 /Fwd EPS grth/ Belvoir Lettings AIM:BLV £40m 115p 9 0.92 6.3% 6.8% 13.4% 13.4% -10m GBP 6 /Debt/ Hydrogen AIM:HYDG £26m 80p 10 0.72 2.5% 25.0% 7.6% 15.6% 5m GBP 6 /Hi RoE or Marg/ Arcontech AIM:ARC £22m 163p 25 0.77 0.8% 54.8% 3.4% 28.5% 3m GBP 6 /Cash Conv/ Rosenblatt Group AIM:RBGP £91m 114p 15 0.80 3.7% 46.0% 2.4% 41.3% 13m GBP 6 /Cash Conv/ Bushveld Minerals AIM:BMN £280m 25p 7 0.26 - 36.5% 36.2% -29.8% 44m USD 5 /Mom or Upgrade/Cash Conv/ Pelatro AIM:PTRO £26m 80p 6 0.43 - 60.0% -0.8% -11.1% 2m USD 5 /Fwd EPS grth/Cash Conv/ PCF AIM:PCF £80m 32p 10 0.47 0.9% 37.3% 23.1% -9.9% -22m GBP 5 /Hi RoE or Marg/Cash Conv/ Synectics AIM:SNX £32m 193p 11 0.56 2.4% 42.1% 23.5% -8.3% 8m GBP 5 /Hi RoE or Marg/Mom or Upgrade/ Springfield Properties AIM:SPR £105m 109p 8 0.58 3.6% 22.7% 12.2% -7.0% -25m GBP 5 /Cash Conv/Debt/ SysGroup AIM:SYS £19m 39p 18 0.55 - 37.3% 72.8% -7.2% -1m GBP 5 /Fwd EPS grth/Hi RoE or Marg/ Crimson Tide AIM:TIDE £12m 3p 26 0.75 - 900.0% -20.6% -5.5% 0m GBP 5 /Fwd EPS grth/Hi RoE or Marg/ Diversified Gas & Oil AIM:DGOC £776m 114p 7 0.16 9.5% 33.3% 0.8% -4.0% -485m USD 5 /Cash Conv/Debt/ MP Evans AIM:MPE £369m 676p 35 0.85 2.6% 146.8% 24.7% -2.0% -8m USD 5 /Fwd EPS grth/Mom or Upgrade/ Secure Income REIT AIM:SIR £1,301m 403p 24 0.94 3.2% 13.2% 3.8% -1.0% -1,007m GBP 5 /Fwd EPS grth/Mom or Upgrade/ Cerillion AIM:CER £48m 163p 14 0.71 2.8% 71.9% -0.2% -2.1% 3m GBP 5 /Fwd EPS grth/Hi RoE or Marg/ Eland Oil & Gas AIM:ELA £271m 125p 4 0.14 - 58.1% 19.2% -1.1% -4m USD 5 /Mom or Upgrade/Cash Conv/ M.T.I Wireless Edge AIM:MWE £20m 23p 9 0.46 5.1% 26.4% 16.2% 0.0% 5m USD 5 /Hi RoE or Marg/Cash Conv/ 1pm AIM:OPM £37m 42p 6 0.58 1.3% 8.8% 12.7% 1.7% -3m GBP 5 /Hi RoE or Marg/Cash Conv/ Serica Energy AIM:SQZ £356m 134p 3 0.06 - 297.5% -20.2% 3.9% 35m USD 5 /Fwd EPS grth/Cash Conv/ Vertu Motors AIM:VTU £147m 40p 7 0.87 4.1% 7.4% 9.0% 12.1% 0m GBP 5 /Fwd EPS grth/Hi RoE or Marg/ Randall & Quilter Inv AIM:RQIH £348m 178p 10 0.50 5.2% 137.6% -19.8% 10.9% 121m GBP 5 /Fwd EPS grth/Cash Conv/ Ashley House AIM:ASH £6m 9p - 0.50 - -57.3% 159.3% 14.3% -2m GBP 5 /Fwd EPS grth/Mkt Cap/ System1 AIM:SYS1 £30m 237p 9 0.24 3.2% 236.4% -10.0% 18.5% 4m GBP 5 /Fwd EPS grth/Cash Conv/ Pan African Resources AIM:PAF £207m 11p 6 0.40 - 35.2% 36.8% 23.3% -105m GBP 5 /Cash Conv/Debt/ Good Energy AIM:GOOD £22m 138p 15 0.33 2.5% 36.4% 34.5% 35.5% -45m GBP 5 /Hi RoE or Marg/Debt/ Source: S&P CapitalIQ, as at 24 Jun 2019

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