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A new buy for the Zweig screen

Created:

11 August 2008

Written by:

David Stevenson

The Zweig screen is a great way of stock picking and finds fast expanding, high growth companies with reasonably cheap and popular shares – it's all about paying a reasonable price for fast growing companies.

Screen Summary: This is a classic, higher risk, growth screen with a twist – based on the writings of American investing guru Martin Zweig, and it insists on buying fast growing companies where earnings growth is accelerating but the share price is still relatively cheap.

The screen in detail:

• EPS growth in current year is at least 20 per cent

• EPS growth over last 3 years is at least 15 per cent

• EPS growth over last five years is at least 10 per cent. With all these three figures put them side by side and look for evidence of earnings acceleration ie. current EPS growth rate more than 3 year and preferably more than 5 year rate

• Relative strength (of the share price) over last one year , and the last 3 months, should be at least positive

• PER should be above 5 and below 40

• PEG below 1

• Sales per share trend above 10 per cent ie. sales growing

• Market cap set at a minimum of £35m

The Current Portfolio

The FTSE 100 may have stabilised a bit over the last month but the market overall is still hugely volatile and very uncertain. Our Zweig portfolio has edged back again over the last month, coming down from an overall gain of 18 per cent (itself a big fall from the month before) to its current advance of just 14.6 per cent overall. This drop can be explained by one simple market trend – junior oils are getting punished. Dragon Oil is down 30 per cent in the last month (triggering a forced sell – see note below) , JKX is down 16 per cent and Tullow Oil 20 per cent. These biggish drops have more than made up for the 20 per cent plus gains for emerging markets fund manager Ashmore and IT services group Axon. They've also cut into the 70 per cent gain in IT services group Detica which has just received a takeover offer from giant BAE. We recommend that you accept the offer.

• Buy DANA Petroleum . We've long had a soft spot for Dana. It has featured on many of our other screens but never quite made it to this one – until now. Its shares have slumped 22 per cent in recent weeks – it's yet another junior oil hurt by the recent fall in global oil prices. Oil may fall much further back in price and Dana is a risky buy at this late stage in the oil bull cycle, especially as its output is unhedged. But Dana is a quality play which will survive and prosper in any prolonged bear market in oil. At current share price it is trading at just 7 times forward earnings, with 134p of net cash on the balance sheet. Dana is hugely popular with many City brokers particularly as its management is regarded as very astute and careful – only a few weeks ago the chief executive announced that net debt now stood stood at £10m, a reduction of £61m pounds from the end of 2007, and that it is on target for an even stronger trading performance in 2008 compared with last year. Timing looks good for Dana - the group is now producing from 30 oil and gas fields and undertaking 3 new field developments, which will come on-stream from 2009 alongside a further 21 potential development projects. So, all in all, a great quality, cheap junior oil stock worth tucking away for the long term – buy at 1289p

• Sell Dragon Oil . This is a forced sell off – Dragon's shares have fallen by more than 30 per cent triggering our automatic stop loss. Dragon is absurdly cheap at current levels, trading at 5 times current earnings and 4 times forward earnings. All of the positives with this stock are still in place - in particular its vast undeveloped asset base, its strong balance sheet, and its long-standing relations with the Turkmenistan government. Sell, reluctantly, at 288p.

Dragon Oil share price over last three years (thin line red/black) versus Dana share price (thick blue line)

You can also track this portfolio online; we assume an investment of £1,000 in each company and make no allowance for stamp duty or dealing charges.

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