A blistering year for our Jim Slator small-cap screen

“All models are wrong, but some are useful,” the British statistician George Box liked to say.

As aphorisms go, it’s hard to beat. As well as neatly describing the scientific method, it skewers the notion that humans can use data and mathematics to ever replicate a world of near-infinite variability. In particular, the quip serves as a subtle rebuttal of economists’ faith in their ability to determine optimal preferences within a complex system, such as an economy or a market.

Another way to look at this is that by choosing what to measure, you implicitly choose what not to measure. And these choices determine your results, which at best can only ever hope to show a version of ‘reality’. However, as Box points out, even imperfect methodologies can matter.

Take a model like a stock screen. If it is built to find the optimal return, it is doomed to fail. By this standard, only the best-performing stock in any given period will do. To achieve this, a model would need an index of every data point contributing to all stock prices, from fundamentals to the resources and decision-making skills of every market actor, as well as God-like predictive powers.

It’s an impossible ask. Fortunately, few investors think of returns in this way. Rather, the goal of investing is more typically conceived of as an effort to maximize returns for a given level of risk. If we set that given level of risk at ‘equities’ (which, for the stock screens that appear in these pages, is the default asset class), then a more realistic aim for any investing model is to give ourselves a better-than- average chance of beating the market, so-called ‘risk-free’ rates, and inflation.

Unlike economic models, which are often fitted to old data, our screens are also living things. That fact alone, I would argue, makes them useful. Sometimes, however, their utility lies in meeting the objective set for them.

Over the past 11 years, our Slater screen – based on the investing principles of the iconic small-cap stockpicker Jim Slater – has had an unusually strong knack of meeting his brief and finding winning hands. Measured by average annual total returns, it is our most successful.

As above, its ‘success’ isn’t defined as identifying the highest-return UK stock you could have continuously owned since we last refreshed the screen. Sadly, the Slater screen’s rules on company size meant it filtered out recruitment and conferencing companies RTC (RTC), which according to data provider FactSet has been the best-performing stock on a total return basis since 24 July 2023.

Nevertheless, the eight stocks it did pick could hardly have done better.

The top three – Ashtead Technology (AT.), Supreme (SUP) and Transense Technologies (TRT) – were all in the top 6 per cent of stocks on a total return basis. Offshore energy services company Ashtead made the top 2 per cent of UK stocks with a continuous listing in the period to 24 July 2024.

2023 Performance

Name	TIDM	Total Return (24 Jul 2023 – 24 Jul 2024)
Ashtead Technology	AT.	128.3
Supreme	SUP	71.1
Transense Technologies	TRT	65.7
DX	DX.	49.0
Me Group	MEGP	27.9
Macfarlane	MACF	19.6
Mind Gym	MIND	-47.9
Argentex	AGFX	-68.8
FTSE Small Cap	–	14.4
FTSE Aim All Share	–	3.7
FTSE Small/Aim	–	9.0
Slater PEG	–	30.6
Source: LSEG

Despite the presence of two dogs in the class of 2023 – training consultancy Mind Gym (MIND) and former Slater screen winner Argentex (AGFX) – the inclusion of so many winners lifted the screen’s total return for the year to 30.6 per cent, or almost 22 percentage points ahead of a straight split of the FTSE Small-Cap and Aim indices, from which it draws its picks.

A year before, the screen’s five picks managed an even stronger 37 per cent total return, by again identifying three stocks from the top tenth of the entire market, by performance. That time, the star stock was vending machine operator Me Group (MEGP)which was among the top 1 per cent of performers in the entire UK market.

What, then, is the screen’s special sauce? Amid what has been a billed as a ‘rotation’ into long-unloved small-cap stocks, it’s tempting to reach for its continued focus on companies with a market value below £500mn. However, this explanation overlooks the fact that the Slater screen has trounced its benchmark since 2016. Although it struggles with the onset of high inflation and higher interest rates in 2021 and 2022, its rip higher since then isn’t wildly above its long-term trend.

What’s more, the screen fishes in the same small-cap pool as its benchmarks. Even if Aim acts as a low hurdle, last year’s Slater picks managed to double the total return of the higher-quality FTSE Small Cap index. Although its returns are more volatile than either small-cap market, the consistency of its outperformance – in nine out of 11 outings – suggests that it hasn’t simply been lucky.

Since we started to follow the screen in 2013, it has produced a cumulative total return of 311 per cent, compared with 65 per cent from a 50/50 split of the FTSE Small Cap and Aim All-Share indices. While the screens in this column are meant as sources of ideas rather than off-the-shelf portfolios, the total return drops to a more pedestrian 222 per cent if a 2.5 per cent annual charge to reflect notional dealing costs is factored in. The reason for such a high frictional cost is because small caps can be very expensive to deal in due to their wide bid-offer spreads.

Variable	FTSE Small/Aim	Slater PEG
Risk free return	1.15%	1.15%
Annual return	6.0%	18.1%
Annual standard deviation	0.114	0.185
Sharpe ratio	0.43	0.92
Beta	1	3.1
Treynor ratio	0.049	0.055
Source: Investors’ Chronicle

The risks have also been worth it. We can say this because the screen’s Sharpe ratio, which quantifies how much volatility an investor must stomach for every unit of reward – itself defined as the return generated above an average risk-free rate of 1.15 per cent since we launched the screen in 2013 – is more than double that of the benchmark.

The screen’s Treynor ratio, also known as the reward-to-volatility ratio and which measures excess returns per unit of the portfolio’s volatility risk relative to the broader market, is also higher than that of the market itself. In short, those occasional lurches lower have been worth it.

The methodology

If the screen does have a secret sauce, it is in the application of some tough filters to a portion of the market where bargain valuations are most frequently found.

The Slater screen (or to give it its full title, the Slater PEG screen), is named after its focus on shares with a low price-to-earnings growth (PEG) ratio. This metric, which Jim Slater helped to popularise, is a simple but effective way of weighing up a company’s share price against the growth on offer and is calculated by dividing a share’s price/earnings (PE) by its earnings per share (EPS) growth rate.

Another attribute Slater liked was evidence of insider share purchases. While director buying isn’t mandated by the screen’s methodology, I have run a shadow test on each of the selected companies to ensure insider holdings have remained neutral or increased on a net basis over the past three months, based on FactSet data. Bar a couple of partner sales at listed private equity fund Pollen Street (POLN)the stocks below pass this test – which I may turn into a mandatory check next year.

The full screening criteria are:

■ A PEG ratio of 1 or less.

■ Market cap of less than £500mn but more than £10mn.

■ Net-debt-to-cash-profits ratio of less than 1.5.

■ Cash conversion of 90 per cent or more (based on operating cash to operating profit rather than the operating cash to Ebitda metric used in the table below).

■ Return on equity of more than 12.5 per cent or an operating margin of 15 per cent or over.

■ Three-month momentum higher than the median average, or forecast EPS upgrades of 10 per cent or more over the past year.

■ Forecast earnings growth in each of the next two financial years and average forecast growth of more than 10 per cent but less than 50 per cent (anything above 50 per cent is considered an unsustainable growth rate for the purposes of this screen).

■ (Shadow test): neutral or positive net insider share purchases over the past three months.

This year, the screen has identified 20 companies from the main and junior markets which tick at least six of the seven mandatory criteria (including the PEG and size tests). They are detailed in the table and downloadable spreadsheet below.

Name	TIDM	Mkt Cap	Net Cash / Debt (-)*	Price	PEG	Fwd PE (+12mths)	Fwd DY (+12mths)	Op Cash/ Ebitda	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR	Fwd EPS grth NTM	Fwd EPS grth STM	3rd month Mom	12-month-old Mom	3-mth Fwd EPS change%	12-mth Fwd EPS change%
Annexo	ANX	£74m	-£68m	63p	0.4	4	2.8%	35%	27.1%	17.4%	21.5%	4.3%	13%	4%	-3.8%	3.3%	5.8%	15.8%
Caledonia Mining	C.M.C.L.	£172m	-£17m	875p	0.2	9	5.1%	76%	22.2%	9.6%	18.0%	–	99%	29%	6.7%	-9.3%	31.1%	34.5%
Central Asia Metals	CAML	£353m	£43m	194p	0.5	8	9.2%	114%	34.1%	17.6%	1.5%	-4.2%	25%	8%	-5.3%	6.9%	-3.0%	-16.2%
Eurocell	ECEL	£157m	-£58m	150p	0.5	9	5.6%	94%	4.9%	9.7%	7.5%	-15.2%	28%	18%	9.5%	32.2%	7.8%	11.6%
Finseta	FINN	£20m	-£1m	35p	0.5	14	–	71%	8.4%	23.2%	–	–	-4%	66%	-13.8%	228.6%	20.5%	–
Galliford Try	GFRD	£308m	£167m	296p	0.8	12	4.3%	130%	1.5%	9.7%	-13.8%	-41.0%	7%	10%	21.3%	48.0%	2.6%	24.2%
Gaming Realms	GMR	£108m	£7m	37p	0.6	12	–	94%	22.0%	24.0%	30.6%	–	31%	20%	7.5%	23.7%	11.6%	24.1%
Griffin Mining	GFM	£258m	£46m	141p	0.4	10	–	114%	16.2%	9.2%	9.6%	-10.3%	26%	-17%	-0.4%	77.0%	108.7%	17.3%
IG Design	IGR	£205m	£21m	209p	0.2	11	2.0%	74%	3.5%	5.9%	7.3%	12.6%	35%	20%	72.0%	74.2%	5.7%	62.6%
LBG Media	LBG	£248m	£10m	119p	0.1	16	–	73%	15.0%	15.0%	27.1%	-43.5%	73%	10%	59.1%	46.5%	2.8%	11.1%
Macfarlane	MACF	£201m	-£36m	126p	0.7	10	3.1%	89%	7.9%	14.5%	5.3%	11.2%	15%	3%	-12.2%	16.1%	2.8%	5.4%
Octopus Renewables IT	ORIT	£418m	£10m	74p	0.4	13	–	293%	–	2.1%	–	–	109%	37%	5.5%	-18.7%	-22.1%	-45.8%
On The Beach	OTB	£243m	£145m	145p	0.6	9	2.4%	205%	14.1%	10.6%	10.3%	-18.1%	18%	16%	-3.1%	59.1%	4.7%	21.3%
Pinewood Technologies	PINE	£295m	-£46m	339p	0.2	38	–	140%	40.8%	1.7%	-64.2%	–	-4%	31%	8.1%	-5.3%	187.8%	-61.4%
Pollen Street	POLN	£450mn	-£192m	720p	0.9	10	7.7%	173%	–	7.1%	1.2%	-4.0%	12%	12%	5.9%	19.0%	-1.7%	9.0%
Synectics	SNX	£31m	£5m	177p	0.3	8	3.3%	58%	8.3%	7.6%	-7.2%	6.8%	35%	27%	-5.9%	64.2%	9.1%	45.4%
Thor Explorations	THX	£92m	-£34m	14p	0.0	2	–	97%	26.1%	17.4%	–	–	63%	-21%	-5.0%	-33.7%	29.7%	59.1%
Time Finance	TIME	£48m	-£1m	52p	0.4	9	–	63%	17.1%	6.7%	-2.1%	-12.9%	13%	–	25.6%	102.0%	8.4%	27.1%
Union Jack Oil	UJO	£19m	–	18p	0.2	8	–	151%	24.5%	–	98.3%	–	157%	21%	-31.1%	-29.8%	29.8%	19.6%
Van Elle	VANL	£41m	-£2m	38p	0.4	9	3.8%	79%	2.2%	5.2%	9.5%	-0.4%	24%	22%	14.6%	-10.3%	-2.9%	–
Source: FactSet. *FX converted to £