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AlphaScreens: GARP makes food for thought

Crossover in the indices we screen for GARP highlights further questions.
July 23, 2018

The overlap between the FTSE All Share index, which includes all the biggest UK-listed companies, and the FTSE All Small Companies Index can be interesting when we are screening both against our slightly different growth-at-right-price (GARP) criteria, for larger and smaller companies. Some small companies included in both indices can pass all the large cap tests and fail some small cap tests or vice-versa.

For example, packaging specialist Macfarlane (MACF), passes our eight large-cap screen criteria but fails on one of the seven small-cap screen metrics. The company falls short on the small-cap screen requirement to convert at least 90 per cent of operating profits into operating cash flow. This is an important measure and it is useful to be especially stringent with smaller companies.  As with all screens, the results are a starting point for further research. Macfarlane’s cash conversion ratio of 51 per cent is a signal to examine the working capital cycle of the company to assess the rate at which orders translate to cash in the bank.

Overall, in this month’s GARP screen:

  • We have eight rules for screening the FTSE All Share, yet out of this universe of over 600 companies, only two pass all the criteria. These companies are Macfarlane and West End-focused commercial property company Shaftesbury (SHB). 
  • Page Group (PAGE) no longer scores perfectly in our All Share screen. This is not necessarily a sell signal for the shares, which have experienced strong momentum this year, but it is an opportune moment to reappraise the longer-term investment case.
  • Our screens for the FTSE All-Small index of small-cap companies and our Aim-listed companies screen each have the same seven criteria. There is no change at top of our All-Small screen and the list of Aim companies scoring well is not much changed either.
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