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Five Genuine Growth shares

My Genuine Growth screen has delivered for a third year on the trot. Five new shares make the grade this time around
November 26, 2015

Returns from the stock market over the past 12 months have been poor, but my Genuine Growth screen has still managed to deliver a 15.6 per cent total return from the eight shares it selected last November, compared with a tepid negative 0.5 per cent from the FTSE All-Share.

 

2014-15 GENUINE GROWTH PERFORMANCE

NameTIDMTotal return (19 Nov 2014 - 17 Nov 2015)
MarshallsMSLH51.0%
SavillsSVS40.3%
Henry BootBHY29.8%
Galliford TryGFRD26.1%
Arbuthnot BankingARBB17.5%
PacePIC12.6%
MP EvansMPE-9.5%
UtilitywiseUTW-43.0%
Average-15.6%
FTSE All-Share--0.5%

Source: Thomson Datastream

 

That result builds on a strong two years for the screen and the cumulative return over the entire period - based on switching wholesale from one screen's stock picks to the next on publication date each year - now stands at 83.3 per cent compared with 26.8 per cent from the index. Including a 1.5 per cent charge to account for dealing costs takes that cumulative return down to 75.2 per cent.

 

Genuine Growth vs FTSE All-Share

 

Part of the screen's success comes down to the fact that it didn't highlight any commodity-related stocks last year. These types of companies have been a thorn in the side of the wider market and a major source of underperformance.

That said, the screen did alight on one noteworthy dog in Utilitywise (UTW), a company that has been punished by the market for its aggressive revenue-recognition policies. Indeed, the inclusion of Utilitywise among last year's picks highlights what could be regarded as a weakness of this screen: it is focused almost exclusively on EPS. Had cash conversion been included as a screening test, I very much doubt Utilitywise would have made the grade.

However, I'm nevertheless quite comfortable with the screen's criteria for now. Screens that ask too much from stocks can quickly get too convoluted and end up not providing any results at all. On that basis, having a screen with a strict focus on earnings is not a bad thing so long as the limitations of the analysis are appreciated.

While the lack of focus on cash may be one of this screen's weaknesses, I think its focus on broker forecast upgrades is probably one of its strengths. Somewhat incredibly, despite broker forecasts routinely changing, the market tends to put a lot of focus on the current numbers in the market while paying little, if any, attention to whether those forecasts are on an up or down trend (I've blogged about this strange and potentially profitable phenomenon here). Indeed, the requirement for recent forecast upgrades will have helped keep this screen commodity-stock free.

This year, in order to get a decent number of results, I have had to soften the screen's valuation criteria so that stocks only need boast a price-earnings-growth (PEG) ratio that is among the lowest quarter of all stocks screened, rather than a PEG of 1 or less. The full screening criteria are:

■ 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 historic three-year average growth rate.

■ EPS forecasts higher today than they were three months ago.

■ A price-to-earnings-growth (PEG) ratio among the lowest quarter of index constituents (either FTSE All-Share or Aim 100). PEG ratio is calculated using average next-two-reporting years EPS growth rates.

Five FTSE All-Share stocks met all the screen's criteria and no shares from the FTSE Aim 100 made the grade.

 

FIVE GENUINE GROWTH SHARES 2015

NameTIDMMkt capPriceFwd NTM PEDYPEGFY EPS gr+1FY EPS gr+23-mth momentumNet cash/debt (-)
Galliford TryGFRD£1.2bn1,409p114.8%0.9111.9%14.4%-21.5%-£18m
NMC HealthNMC£1.4bn764p180.7%0.9540.6%14.2%-0.1%-$409m
ParagonPAG£1.3bn424p112.1%0.9012.1%16.3%2.5%-£9.2bn
MondiMNDI£7.1bn1,470p152.1%1.1425.1%7.3%-5.7%-€1.8bn
PendragonPDG£629m44p122.8%1.1715.3%5.7%-5.6%-£53m

Source: S&P CapitalIQ