Ballooning valuation

Back in 2014, writing in The Telegraph, Jim Slater touted Restore plc (LSE: RST) as a buy. The company specialises in document storage, scanning and shredding, to help businesses move into the paperless, digital world.

Since the guru tipped it, the company’s valuation has ballooned from £133m to £416m. I’m going to apply Slater’s famous valuation techniques to this company to see if it’s still good value after today’s trading update.

The company’s priority has been to integrate the acquisitions Wincanton Records Management and PHS Data Solutions, which has seemingly gone off without a hitch. This has led to the expected synergies and trading in-line has been with expectations for the full year.

Analysts expect earnings to come in at 20.75p per share next year and 17.05p per share for this year just ended. Therefore, the company trades on a PE of 21.5 and is expected to grow earnings by 21.7%.

To check if a growth company was good value, Slater used the PEG ratio. He would divide the company’s PE by its earnings growth rate. A result under 1 implied significant value could be on offer. Restore’s PEG ratio is roughly 1, compared to 0.63 when Slater first picked it, indicating there may no longer be enough upside to the shares.

Let’s take a look at another Jim Slater pick.

Rather bullish

Slater mentioned Telford Homes (LSE: TEF) in the same article as Restore, although it’s not performed anywhere near as strongly. Back then, its market cap was £172m. Now, it’s £237m.

The property developer builds homes in central London, where there is a significant demand for extra housing. Telford has confirmed that Brexit has done little to dampen demand, yet still it trades on a PE of only 8 and will offer a yield of around 4.8% if the final dividend grows by as much as the interim.

However, analysts have predicted that Telford’s earnings will fall next year, largely due to a small correction in London property prices. This makes calculating a PEG ratio impossible. That said, I’m not sure Slater would dislike Telford because of just one bad year of growth. Indeed, his original thesis seemed rather bullish on London property.

I believe Slater’s assessment was likely correct. In the next six or so years, a populace nearly the size of Birmingham is expected to pour into London. That’s clearly going to increase housing needs, potentially supporting high prices and catering to Telford.

However, property prices are notoriously difficult to forecast. Interest rate rises would, for example, make debt more expensive, therefore likely resulting in a fall in house prices. Brexit too introduces yet more uncertainty into the equation.

The post Does this Jim Slater stock pick represent good value right now? appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Jim Slater’s early career was not without controversy, and the investment firm he started with Conservative MP Peter Walker, Slater Walker, built a reputation as an asset-stripper, buying up companies and selling off underperforming assets to net nice profits — although Jim himself argued that if a firm is not properly using its assets, it deserves to have them stripped.

Slater Walker was hit hard during the recession of the seventies, and Slater was forced out after the firm was bailed out by the Bank of England. The crash turned Slater into what he famously called a “minus millionaire”, but after a little while writing children’s books he was back in the world of investment, writing share-tipping columns for a number of publications.

The Principle

The famous Zulu book was published in 1992, working on the idea that it’s relatively easy to be come an expert in a narrow field, and that if you do so in the world of investing you’ll be ahead of the great majority of the market. The narrow field the book espoused was that of growth investing, and detailed a process by which future growth stars can hopefully be identified. It revolved round what has come to be known as the PEG ratio, which compares a company’s P/E with its forecast EPS growth rate — and a low enough ratio suggests a share is undervalued in relation to its growth prospects.

It was that idea, and that book, that gave me the kickstart I needed to go looking for small cap growth opportunities all those years ago, and I did reasonably well at it — with the occasional spectacular failure, but that’s to be expected with that kind of strategy. (Although as I get older, I’m looking more for undervalued shares offering high dividend yields and with lower risk.)

I also had the pleasure of listening to Jim at an investors conference many years ago. I can’t remember when it was, and I can only remember two other speakers — one was Alvin Hall, who entertained but didn’t really educate, and the other was Terry Smith, the author of the fraud-busting book Accounting for Growth (which is another I’d recommend to anyone starting out in the stock market).

Capitivating

Jim captivated his audience, hammering home his enthusiasm for his Zulu approach in a way that it’s just impossible to glean from simply reading a book, and I for one went away feeling significantly motivated. I can also still remember the dreadful joke he opened his act with, and I’m grateful for one career decision that he made — to stick with investing and not try his hand at stand-up comedy.

Today, all these years on, Jim’s stock-picking methods are still as fresh and effective as they have always been, because they’re based on simple investing principles — understand what you’re buying, ruthlessly avoid emotional attachment, and only buy shares when all the fundamental indications suggest they’re cheap.

Jim Slater was a controversial figure, certainly not universally liked, but I’ll miss him.

The post What We Learned From Jim Slater appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?