Eight cheap growth shares

As well as building a reputation based on the level of returns his fund delivered, he was also known for the consistency with which his fund outperformed the market. On the latter point, my screen, which is inspired by the characteristics Mr Lynch looked for in his "stalwart" stocks, has certainly failed to match up in its first five years of life. The chart below illustrates this, with a huge return in 2013 substantially reversed by the screen's performance in 2014.

Peter Lynch screen

The screen has delivered a cumulative return of 99 per cent over the five years I've run it compared with 62 per cent from the FTSE All-Share. If I factor in a 1.5 per cent annual charge to account for the notional cost of switching between portfolios at publication date each year, the return drops to 85 per cent.

While the overall result from last year's screen looks more sedate by comparison with previous years - a small underperformance of a strong index return that was fuelled by the recovery in the resource sector - the final outcome hides some serious thrills and spills along the way. As can be seen in the chart, Brexit threw my Lynch stocks a most unwelcome curve ball. This time last year, the screen picked a number of housebuilders as well as some other very cyclical plays. These stocks were left reeling when results of the EU referendum vote came in on 24 June. But what was then very significant underperformance has now been all but erased.

2016 PERFORMANCE

Source: Thomson Datastream

Mr Lynch's homely wisdom captures many aspects of stockpicking that are popular with private investors as well as professionals. His techniques are outlined in his 2000 book One Up on Wall Street. Among the investment pearls often associated with him are vaunting the virtues of boring companies, with unmemorable names operating in unattractive industries because the market is prone to overlook the merits of such businesses. He's also an advocate of investing in uncomplicated businesses, which are hard for management to mess up. He's a fan of directors buying and owning shares in companies. He's also associated with a buy-what-you-know approach, although this is arguably an attribute of this style that gets over-egged.

From a screening perspective, though, it is Mr Lynch's fondness of the price/earnings-growth (PEG) ratio, also promoted by the likes of Jim Slater and John Neff, which provides the 'Lynch' pin when trying to mimic his approach. Mr Lynch also factors in dividends when assessing a potential 'stalwart' share's attractiveness based on PEG. The ratio itself is used as a rough-and-ready measure of the price one is being asked to pay for growth and can be a very effective guide to value if used well. The screen uses several other factors that try to encompass other aspects of Mr Lynch's techniques used when hunting out stalwarts. The screen's criteria are:

Eight shares passed all the screen's tests this year. There is a cyclical flavour to the selection, which has been a feature of this screen's results over the years. The shares are ordered from lowest ('cheapest') to highest PEG ratio below. I've also looked closer at the cheapest stock on the list based on the PEG ratio, as well as the most expensive and one of the stocks from in-between.

Eight cheap growth shares

Source: S&P CapitalIQ

For several years logistics group Wincanton (WIN) has been going through a period of rehabilitation as it uses improved trading to pay down debt while attempting to keep on top of a spiralling pension deficit, which stood at £169m at the last count. A major step was taken in this process last year when management finally felt confident enough to reinstate the dividend and a useful 3.5 per cent yield is forecast for the current year.

Another sign of management's confidence in the improved balance sheet strength was a push to pay bills ahead of the year-end, which led to a £37m hit to cash flows but has brought year-end net debt far closer in line with average net debt during the year. And should fledgling signs of an upward turn in bond yields continue to play out, there could also be some alleviation on the pension front. A triennial review of the pension fund was scheduled to begin last month.

On the trading side, Wincanton looks set to benefit from a number of trends. The increased complexity of logistics operations caused by the advance of so-called multichannel retailing (selling things online as well as in shops) is helping create demand for its services, as is increasing use of outsourcing by hard-pressed retailers looking for savings. The uncertainty around Brexit may also boost demand although, any associated economic slowdown can be expected to hurt this cyclical business.

The prospects for the shares could also be helped by the recent relisting of Eddie Stobart Logistics (ESL), which was well backed by big-name institutions. This may help to raise investor awareness of the attractions of the sector. And the low earnings multiple Wincanton shares trade at means there is scope for a re-rating as balance sheet worries continue to subside. Indeed, even factoring in the pension deficit broker Cantor puts net debt at a very manageable two times expected cash profits.

Last IC View: Buy, 243p, 12 Jan 2017

McColl's

Thin margins, a competitive market and falling like-for-like sales are some of the key factors that help explain the high yield and low earnings multiple offered by shares in convenience store group McColl's (MCLS). However, the forecasts of EPS growth that have earned the shares a place among the Lynch screen picks speak of something more positive also going on at the group. Indeed, while like-for-like sales have been falling, the company has been more than making up for this with its gross margin growth, which it has achieved by moving away from low-margin products such as tobacco towards higher-margin products such as food-to-go and alcohol.

While like-for-like sales were down 1.9 per cent last year, the rate of decline is slowing. This suggests the group's attempts to entice more people into stores with things such as Post Office counters, Amazon lockers and Subway franchises may be working. The company has also been sprucing up its estate with refurbishments and the disposal of small shops. What’s more, convenience shopping is an area of food retail that investors are relatively positive about.

The really big opportunity for McColl's in the coming years comes from its £117m acquisition of 298 Co-operative food stores in 2016. Not only is it likely that profits at these stores can be improved with changes to the sales mix - as it has done with its existing estate - but the group's increased scale resulting from the acquisition is expected to give it more clout as a buyer, which should help it raise margins for the group as a whole. So far, the integration seems to be going well.

The shares' high yield is supported by a track record of good cash conversion and the modest forecast earnings multiple leaves room for re-rating upside despite the good run recently enjoyed by the shares. Rising costs across the industry do present some challenges, but self-help and the Co-op deal currently seem to be overshadowing this.

Last IC View: Hold, 180p, 27 Feb 2017

Currency movements and recovery are two of the key factors propelling forecast profits growth at ground works specialist Keller (KLR). While the company reported record sales last year, its bottom line performance was less impressive, especially after adjusting for currency benefits. Indeed, underlying constant currency EPS was down by over a fifth.

The key thorn in Keller's side recently has been its poorly performing Asia-Pacific operation. A large one-off liquefied natural gas project had helped the division report an £11.7m profit in 2015, but last year this plunged to an £18m loss as a combination of intense competition and falling demand squeezed the operation. While management has made a significant restructuring push, the expectation that break-even will not be achieved until 2018 has been met with some disappointment in the City.

Brighter prospects for the business come from the US and Europe, where sales and profits are rising. That said, Canada is somewhat tempering the performance of the North American division (54 per cent of revenue). Likewise, other parts of the Europe, Middle East and Africa division (31 per cent of revenue) are less impressive, although some big one-off contracts should boost 2017 performance.

If a recovery in Asia Pacific comes through while the other divisions hold up, then investors may get behind the value identified by the screen. There's also a decent forecast dividend yield of 3.3 per cent this year that's expected to be three times covered, although it's worth noting that net debt has been on the up over the past five years.

Last IC View: Hold, 854p, 27 Feb 2017