As a small firm, MFM Slater does not waste time on stocks that do not fit its profile of dynamic growth, modest price/earnings ratios and strong cashflow- a policy that has proved successful.
Team cuts to the chase for growth
I have spent a small fortune on Peppa Pig’s royal palace, Peppa Pig’s bath-time boat, Peppa Pig’s toothpaste and even Peppa Pig’s My First Laptop. And some of the cash lavished on my niece Rosa is now in the hands of Mark Slater and his investors.
The largest holding in Slater Growth is Entertainment One, which holds the rights to the Peppa Pig cash machine. Entertainment One is one of those stocks we all wish we’d bought. Back in early 2009 it was trading at a lowly 16p but is today about 190p, amid fresh speculation of a takeover bid.
Even when Slater bought the stock in summer 2010, it had only recovered to about 50p. It was ignored and unloved as it had built up substantial debts, and most of its shareholders - hedge funds - were in a pretty parlous state themselves and were selling out.
“After the hedge funds sold out it fell through the floor,” says Slater. “We took a look at it and saw that it had very able management and was generating lots of cash. The debt had started to come right down but it was still trading on just four to five times earnings.” (Collinson continues below)
Slater likes the children’s TV franchise business, having previously done well out of Bob the Builder and Thomas the Tank Engine. “We saw that the Peppa the Pig business was completely undervalued. It’s now doing very well in the USA, where it’s has gone straight into Nickelodeon’s top 10. They are going to make a lot of money in the USA.”
Slater reckons that Peppa only has to do three times the level of sales it is achieving in Britain for Entertainment One’s profits to start gushing. And he sees it doing five to 10 times what it has so far done in Britain. Not surprisingly, he’s holding on to the shares, which are still trading at just 12.5 times earnings.
Slater is an entirely bottom-up manager, looking for stocks with a dynamic growth profile, modest price/earnings (p/e) ratios and strong cashflow. That gives him a choice of about 150 stocks, from which he creates his portfolio of 30-40 holdings.
Mostly it means he goes fishing in the small and mid-cap pool, although he does hold large caps such as BAT and Imperial Tobacco.
His performance figures are outstanding. Slater Growth is ranked absolute first over three years out of 278 funds in the IMA All Companies sector, with a gain of 120% compared with 27% by the average fund. Now, if this was down to just being lucky on a few soaraway stocks, his one-year figures might not look so good. But over one year he’s second out of all the funds in his sector, giving his investors 7% when the average fund has lost 5-6%.
“We are a small firm and we have to manage the ridiculous amounts of data available to investors as efficiently as possible,” says Slater. “We make sure we are not distracted by companies that don’t fit our criteria. Our other big thing is avoiding problems.”
Of course, we all want to avoid problem stocks, so what’s his secret? It comes down to picking stocks where the business environment they operate in doesn’t face headwinds. So Slater is completely out of financials and retail.
He mentions Cape as the sort of company benefiting from a strong operating environment. It acts as a maintenance provider to oil and gas rigs. After BP’s blowout in the Gulf of Mexico, no one is taking any chances. “What Cape does is not particularly hi-tech, but its standards are very, very rigorous.” says Slater. “It also enjoys steady income from maintenance contracts that are often of three to five years’ duration.” Cape is on 10 times earnings and is growing at 15% a year, so it’s another stock Slater is happy to hold on to.
Andor, an Irish tech stock, is a another Slater favourite. It’s the market leader in high-end digital cameras that are able to take sharp images in the lowest light. It sells mostly to the research and development market and academia, but is beginning to expand into the middle market. “I bought it on a P/E of 12 and the business has been re-rated to a P/E of 17, but I still think it’s a very strong story,” says Slater.
Alongside Andor in Slater’s top 10 stocks is Oxford Instruments, a nano-technology specialist, which has also enjoyed a re-rating.
At this point you’re probably wondering if Slater Growth isn’t really just a tech fund. But Slater insists it is not - Peppa the Pig is hardly high-tech - but he is a big fan of what he describes as “IP [intellectual property] -rich” stocks.
He won’t buy if they are not generating cash or are too pricy, which rules out a lot of tech candidates. It also meant he wasn’t in Asos, though. “We looked at it but it was always too expensive. We won’t go over 20 times earnings.”
Slater has run the fund for many years but the outperformance dates almost precisely from the day when it changed tack from being a more cautious pension fund into what Slater describes as “the purest manifestation of our core process”.
The biggest investor in all of Slater’s funds is Slater himself. “We very much eat our own cooking,” he says.
”The biggest investor in Slater’s funds is Slater himself. ’We very much eat our own cooking’”
But given its record, the most peculiar thing about Slater Growth is its size - just £46.9m. Why aren’t more people investing? It’s not as if the Slater name is unknown - there’s still a generation of people who recall the heady days of Slater Walker. Maybe the buccaneering, corporate raiding days of Jim Slater (and his downfall) puts some people off, although son Mark has nothing but reverence for his father.
The chances that investors coming in today will enjoy anything like the 120% gain of the last three years are rather slim, Slater admits. But he’s still optimistic, despite the economic gloom.
“There’s still a lot of gas left in the tanks in the stocks I hold,” he says. “It was absurd that many of them were on just four to five times, but it’s just as absurd that so many of them are on just 10 times.”
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