Since I started to track my Late Bloomers strategy three years ago, it's fair to say that it has yet to really come into bloom, and over the past 12 months it has actually underperformed the index. But the principle behind the approach remains worth pursuing. The screen looks for companies that are valued at a low multiple of sales and offer upside based on their historic price-to-sales (PSR) valuation range. On the basis that stocks tend to be priced at low multiples to sales when the profits from those sales are low, the screen also looks for signs that there may be the potential for profit margins to increase.
This is a stock-hunting approach that is arguably best suited to rooting out recovery and cyclical plays. The results from this year's screen seem to bear this out, not least because the IC's Recovery Tip of the Year - RPS - is among the stocks identified. That said, the screen's insistence that companies picked have rising sales meant that last year it missed out on the massive recovery play that was the resources sector. This is one of a few tests thrown into the screen to try to eliminate basket-case stocks. The full criteria are:
â– PSR of less than one. â– PSR at least one-third below 10-year peak. â– Ebit margin at least a third below 10-year peak. â– Net debt of 1.5 times cash profits or less. â– Rising year-on-year sales in the past six months. â– Positive free cash flow. nb financials are excluded from this screen |