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If you would like to ask Jim Slater a question please complete the feedback form.
Q How do you decide when to sell a share?
A I have been asked this question hundreds of times, so I prepared a treatise on the subject for REFS subscribers in August 1996. It is still completely valid and I suggest that you study it in detail.
Q What are the differences between Beyond The Zulu Principle and The Zulu Principle?
A The Zulu Principle is written in a more general way and covers growth shares, emerging markets, technical analysis, shells, cyclicals and recovery stocks. Beyond The Zulu Principle embraces lessons I learned while devising Company REFs in conjunction with the publishers, Hemmington Scott. It focuses on growth companies including a very detailed chapter on technology shares. There is also a chapter on the desirability of high-year relative strength against the market and the importance of cash flow per share being in excess of earnings per share.
I also show readers how to use Company REFs and elaborate on some points of fine tuning on the use of PEGs, the importance of accelerating earnings per share and the capacity of a company to clone its activities.
After reading my primer, Investment Made Easy, it would be possible to leap straight to Beyond The Zulu Principle, but readers who are finding the going hard would be better advised to read The Zulu Principle first and then progress to Beyond The Zulu Principle.
Q Exactly what do you mean by a growth company?
A A growth company is generally accepted as one that increases earnings per share year after year. In practice, companies often have setbacks. In Company REFs we decided that to qualify as a growth company the following criteria must be met:-
I should stress that many investors might disagree with our definition and prefer their own tailor-made one.
Q Why do you so often recommend companies that can 'clone' their activities?
A Retailers, pubs, nightclubs, restaurants and healthclubs are the most usual companies to have an activity that can be 'cloned' (ie. reproduce again and again).
The attraction of 'cloning' is that the basic work of honing and refining the retailing formula only has to be done once. As soon as the formula is proven, it can be expanded nationally. As this happens, every new outlet adds to profits, central overheads usually fall as a percentage of overall costs and greater buying power enables the company to put pressure on supplies and improve margins. It is a kind of virtuous cycle that can be very beneficial to shareholders.
Q What is your opinion on selecting shares based on the price sales ratios instead of price earnings ratio. Why is it that it is very rare to find the sales to be quoted in any newspapers or tip sheets? I do read your articles in the Mail on Sunday and it seems you also tend to miss out the sales figure.
A It is true to say that the price-to-sales ratio is rarely referred to in investment commentaries and tips. However, I do believe that it is a very powerful measure especially when applied to value stocks and asset situations. It is also a valuable measure when applied to growth stocks to make sure that their share prices retain an element of realism. If a price-to-sales ratio rises to over 2.0 it is definitely a warning signal that should be borne in mind. One does, of course, have to take into account that companies with fast-expanding sales soon make past high price-to-sales ratios comparatively academic.
Q I have read carefully your writing on 'when to sell'. However, when you've decided that the story hasn't changed, the company still has all the excellent prospects that encouraged you to buy in the first place, but the share price is still dropping away, what do you do? Hold indefinitely for a recovery that might be a year away or cut your losses?
A It is always very difficult to decide when to cut a loss if a share price is dropping away and losing relative strength without any explanation. This sort of price action does, of course, prompt you to try to find out exactly what is happening and why the share price is falling. Many people believe in cutting losses at a set limit, but I never do this personally unless I find that the 'story' (what attracted me to the share in the first place) has definitely changed for the worse.
Q Is there any easy reference to ex dividend dates for all companies? I find it useful information when considering a buy or a sell?
A When you ask if there is any reference to ex-dividend dates for all companies, I presume that you are referring to Company REFs. The answer to your question is that there are very comprehensive details of key dates including both interim and final ex-dividend dates. I concentrate personally on growth shares and find that dividends are only really useful as a further guide to the optimism of the directors. If they have been consistently increasing dividends by a certain percentage, I begin to worry if that percentage falters.
Q With a share that increases about 11% in 5 days, how do you know when it's the right time to sell?
A When it comes to when to sell a share it is irrelevant how much it has gone up in the previous five days. I suggest that you read my treatise on When to Sell.
Q Aren't your calculations of PEGs very dependent on brokers' forecasts which are often wrong?
A In spite of the problems, I prefer to know brokers' forecasts rather than fly blind. PEGs only work for growth shares with a proven past record. This provides extra comfort as do my other selection criteria such as strong cash flow, high relative strength and the absence of substantial directors' selling. It is the combination of these factors that on average provides such exceptional results.
Q After having read several books on investment I found that they all say sell a share when it is overvalued but none of the books appear to say how to tell when a share is overvalued. I know you believe in the PEG approach but even this approach does not prevent a share becoming overvalued. If, for example, a growth share is predicted to grow 80% next year, under the PEG approach it wouldn't be overvalued until it's PER exceeds 80, but conceptionally that share is also certain to be overvalued (assume that you bought the share when the growth rate and PER were both much smaller). Is there some method of valuing a share other than the PEG approach and, if nothing obvious comes to mind other than having a feel for these sorts of things, then should the PEG value at which you are willing to sell be somehow tapered so that the PEG value says decrease inline with however in excess of say 20 the future predicted growth rate is.
A When I wrote The Zulu Principle in 1992 I suggested buying shares on PEGs of 0.75 or under and selling on PEGs of 1.2 or over.
Since then the market has risen substantially and the average PEG is about double the 1992 level. In today's market I would try to buy shares with PEGs of under 1.0 and sell them at about 1.5.
However, as a company gains in popularity and its PEG approaches 1.5, it often overshoots by a considerable margin. During this heady period I let the PEG run over 1.5 and sell only when I see the shares begin to falter.
The key to making sure that you are not taking undue risks by buying shares growing at say 80% on a PER of 80, is to limit both the growth rate and the PER to sustainable levels. In today's market with very low inflation, a PER of say 25 and a maximum growth rate of 40% seem to me to be about the right kind of limits. Of course, 40% is not sustainable for any length of time but a few companies have managed it for several years during which capital gains have been immense.
Q I notice that IT stocks have a very poor cashflow/earnings ratio according to your standards. Why is this and can exceptions be made in their cases? Some of the high fliers have very poor ratios and because of this I am hesitant in buying them although they keep going up. By IT stocks I am including recruitment service providers as well as software personnel.
A I share your views on IT stocks and it would certainly have been right to make some exceptions in the case of some IT and executive recruitment companies. However, I try not to do this and as a result I have missed a few good opportunities. Mind you, a few of them have faltered since and, in the long run, I find it pays to stick to my insistence of strong cash flow. Otherwise it is only too easy to make more and more exceptions until in the end you wonder if you have any discipline at all.
Q I have read what you have written in Beyond the Zulu Principle and in Investing For Growth with regards to selling. You recommend selling when the story changes, if the price drops and there are reasons for it or when the PEG goes above 1.
What would you say about shares where the price has gone up considerably and so has the PER. If the PER was around 30 but it had a growth rate which brought the PEG down to below 0.5. With such a high prospective PER would you be considering selling it or would you stay with it or would you stay with it as it has low PEG?
A Deciding when to sell a share is always difficult especially if the earnings per share of the company are continuing to grow at an exceptional rate.
First, there is often a capital gains tax problem which can make it very expensive to sell especially if the intention is to reinvest in something comparable.
Nowadays I would not buy a share on a prospective PER of over 25. However, I would not necessarily sell a share on a PER of over 30 if rate and the market was beginning to fully appreciate the merits of the company. Sometimes these kind of shares have massive status changes and literally reach for the sky. While the share in this kind of phase I let it run but once the PER gets above 30 I am looking for an opportunity to sell and usually do so when the upward movement begins to falter.
I am sorry that I cannot be more precise than this.
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