Speciality pharmaceutical company Alliance Pharma (LSE: APH) appears as the second-largest holding in the Slater Growth Fund, which is run by outperforming fund manager Mark Slater.
In 1992, Slater helped his dad, Jim Slater, research and edit the well-known investing book The Zulu Principle, and he invests using a strategy similar to the one his father once employed. He co-founded Slater Investments in 1994 and, as the firm’s chief investment officer, he’s ranked as one of the top-performing UK fund managers over the past decade.
A time-tested strategy that works
My guess is that Slater has developed and evolved the Zulu Principle strategy to help him achieve such a good investment record. However, he’s in print as saying that the primary valuation tool he uses to select shares is the price-to-earnings/growth ratio, or PEG, which featured strongly in the book. The PEG compares a firm’s valuation against its growth rate and is aimed at identifying growth available at a reasonable price. He also looks for sustainable and above-average earnings growth prospects, strong cash flow, the presence of a competitive advantage in the firm’s operations, a positive recent trading statement, and an absence of “heavy” directors’ selling of the firm’s shares and, “ideally”, some recent directors’ share buying.
Alliance Pharma must have once satisfied all of those conditions, but the firm has been in the fund for a long time. Slater once said that when he finds a firm that satisfies his search requirements he’s reluctant to let it go because they’re rare. He tends to hold on to the growth stocks he buys for a long time to allow the growth potential to play out. And in the case of Alliance Pharma that ‘hold’ strategy is working out well.
I last wrote about the firm in March when the share price was close to 68p, and the forward P/E rating was a little over 13 for 2019, which I thought was “a reasonable valuation for a business with so much potential.” Today’s share price of around 89p has pushed up the forward P/E rating to around 17, suggesting that investors have ironed out the valuation anomaly I spotted six months ago. However, today’s half-year figures are good. Constant currency revenue moved 12% higher compared to the equivalent period last year, like-for-like currency-adjusted revenue increased 4%, and underlying earnings per share rose 4%. The directors described the outcome as “in line with expectations” and pushed the interim dividend up by 10% in a show of confidence in the outlook.
Growth on the agenda
During the period, around 47% of revenue came from the UK and Ireland, 31% from wider international markets and 22% from mainland Europe. Growth is on the agenda and the firm aims to expand both organically and through acquisition. Non-executive chairman David Cook explained in today’s report that growth initiatives during the period included the creation of an Alliance office in the US, the acquisition of Nizoral, which brings “increased scale and opportunities for us in the Asia Pacific region” and the recent UK approval of Xonvea, which offers “additional opportunities for growth in the medium term.”
The outlook is positive and I can see why Slater wants to keep hold of shares in this steady growth firm. I think the stock is attractive.
