The last 12 months have seen a turbulent but ultimately strong performance from last years Genuine Growth portfolio. The five stocks picked by the screen managed to produce a 13.6 per cent total return between them compared with 2.1 per cent from the FTSE All-Share. It was impressive too that only one of the five stocks, Sports Direct, underperformed the index (see table).
| Name | TIDM | Total return (12 Nov 2013 - 10 Nov 2014) |
|---|---|---|
| EasyJet | EZJ | 33.4% |
| St James' Place | STJ | 17.4% |
| CLS Holdings | CLI | 13.3% |
| Berkeley Group | BKG | 8.4% |
| Sports Direct | SPD | -4.3% |
| Average | - | 13.6% |
| FTSE All Share | - | 2.1% |
Source: Thomson Datastream
The turbulence during the year seems to have coincided with increased market nervousness over the summer regarding the trajectory of monetary policy and the slowdown in emerging-market growth (see graph). It's unsurprising that these factors would hit growth stocks harder than other parts of the market, but the ructions nevertheless serve as a reminder that pursuing a growth strategy comes with its fair share of risk. However, taking on this risk has certainly paid off over the two years I've been running the screen in its current form, as the cumulative total return, which excludes dealing costs and spreads, stands at 57.6 per cent compared with 25.7 per cent from the FTSE All-Share.
Genuine growth vs FTSE All-Share
Source: Thomson Datastream
The screen itself is primarily concerned with looking for signs of sustainable earnings growth by assessing both historic and forecast growth rates. Importantly, it looks for rising consensus growth forecasts for stocks. While brokers forecasts are often criticised for their inaccuracy, if they are being revised upwards it suggests brokers are at fault for being too cautious, which means the potential for more share-price upside as forecasts continue to be upgraded. The screen also uses the price-to-earnings-growth ratio as an indicator that the growth on offer is available 'on the cheap'.
The full screening criteria are as follows: ■ Average EPS growth rate, based on the historic three-year compound average growth rate and forecasts for the next two reporting years, of 15 per cent or more. ■ Average forecast EPS growth for the next two reporting years of at least half the average three-year growth rate. ■ EPS forecasts higher today than they were three months ago; ■ A price-to-earnings-growth (PEG) ratio of less than one. Where possible the PEG ratio is based on long-term (3 years plus) consensus forecasts. Where long-term forecasts are not available I've used average forecast growth for the next two reporting years and highlight the ratio in the table with an asterix. |
One change I have had to make to the screen this year is to drop the £500m market cap limit that I have previously applied. Had I kept the limit in place there would only have been three results, which in my view is inadequate. The stocks screened, however, are all from the All-Share and Aim 100 which means the screen still excludes the market's real small fry and avoids the extremes of illiquidity that such stocks can present.
All eight stocks that passed this year's screen are rated a 'buy' based on the fundamental view of the IC's specialist writers. The shares are arranged by lowest to highest PEG.
EIGHT GENUINE GROWTH BUYS
