part0027

1. What Works on Wall Street by James O’Shaughnessy has now been published. His research based on 40 years of US data from 1954 to 1994 shows a mass of performance statistics which include the following particularly interesting results:

O’Shaughnessy did not research the use of PEGs because forecasts were not available over the whole period. However, as you can see, his evidence strongly endorses the other criteria outlined in this book.

2. Jonathan Steinberg, the six times winner of the Wall Street Journal’s stockpicking contest, has written Midas Investing . His main investment criteria are:

a) High relative strength and the achievement of new highs.

c) Upward revisions and brokers’ forecasts.

e) Strong EPS growth than can be purchased on a low price-earnings ratio. Steinberg regards the PEG as a far more important indicator than the price-earnings ratio and always uses it to decide whether or not a share is a buy. He looks for shares with a growth rate well in excess of the price-earnings ratio (i.e. a PEG of well below 1.0).

Steinberg’s criteria are virtually identical to my own, although I was surprised to see that he did not regard cash flow as critically important. However, in his monthly magazine Individual Investor , in January 1997, well after publication of his book, he said that Individual Investor had learned from its mistakes and that in future it would be placing increased emphasis on cash flow and balance sheet strength.

3. A piece in Barrons drew attention to research by David Lipshutz of Morgan Stanley. He studied the performance of 1000 of America’s largest companies over a period of more than 11 years. He found that companies with the lowest PER in relation to their growth rates (i.e. low PEGs) significantly outperformed the market overall. He also found that the companies with the highest PEGs were the worst performers. ‘It is amazing the results were so uniform,’ Lipshutz said, ‘It shows the power of the concept.’

4. Further support comes from Prudential’s Claudia Mott. She calculated PEG ratios for 5041 MidCap stocks going back to 1982. In the 14 years ending in December 1996, she found that MidCap stocks with PEGs of less than 0.75 returned an average of 19.2% a year turning a $1000m investment into an impressive $1166. The average stock with a PEG of between 1.0 and 1.25 grew 16.5% a year during the same period, turning $1000 into $846, while stocks with PEGs of over 2.0 returned just 10.8%, producing a meagre $421. She concluded that shares with a PEG of under 1.0 were good value, fair value up to 1.25 and over that they became expensive.

5. The four shares I selected using Company REFS on 29 November 1995 had appreciated by 29 May 1996 by 64.6%, as explained in chapter 14. Since then, they have continued to gain on the market. By September 1997, the four shares had appreciated by an average of 167% compared with the market’s performance of only 29% during the same period.

6. The eight shares in my 1996 New Year’s portfolio for the Financial Mail on Sunday selected on 29 December 1995, have also continued to beat the market significantly. As we saw in chapter 15, they had gained 27% by June 1996. By 30 September 1997, the six residual shares (one was sold for a loss of 4% and another was taken over for a profit of 35%) had appreciated by an average of over 100%, against the market’s 28%.

7. My son’s fund, the Johnson Fry Slater Growth Fund, has continued to increase in value. During 1996, on an offer-to-offer basis, net income reinvested, it was the best performing unit trust in the UK with a gain of 59.1% against the market’s 15.7%.

In October 2000, Legg Mason, who acquired Johnson Fry, decided to change the management of Slater Growth by bringing it in-house. Legg Mason then changed the approach by concentrating on highly-priced technology stocks at what proved to be the wrong time.

A new Slater Growth fund is now being advised by my son Mark. It is interesting to note that using the PEG principle with all the criteria in October 2010 it is first out of 2829 unit trusts in all categories with a gain over the last year trailing of 75%.