Check out the mid-caps that meet the ‘Zulu Principle’ for growth stocks

British chartered accountant-turned-investment guru Jim Slater, who used to write an investment column in a newspaper, created a classic filter to identify growth stocks. He characterized it as the ‘Zulu Principle’ to pick stocks with positive momentum in both their financials and price.

It combines multiple parameters including price-to-earnings ratio (P/E), price-earnings growth (PEG), earnings per share (EPS) and return on capital employed (ROCE). It also couples these metrics with a technical charting parameter of relative strength index (RSI).

The RSI captures momentum for a stock with a higher value in a scale of 1-100 indicating that it is likely overvalued and could see a reversal while a lower value could be a signal for undervaluation.

To select growth stocks, we applied the following filters: 1) Low PEG (under 0.75) and P/E ratio of under 20 for the last 12 months; 2) EPS growth for the last four quarters above 15%; 3) Annual ROCE above 12%; and 4) RSI scale above 35. After applying these filters, we get a list of close to 300 stocks.

Focusing on only the mid-cap space, we get a list of around 16 stocks with a market value between Rs 5,000 crore and Rs 20,000 crore that meet the filters combining fundamental and technical metrics.

This list has a good mix of companies representing different sectors including real estate, financial services, media, auto component, steel, IT and infrastructure among others.

This is in contrast to the large-cap peers that meet this criterion. The large-cap list is dominated by commodity firms in line with the sweet spot of Slater, who was an active investor in mining stocks in his heydays.

The mid-cap stocks that meet the Zulu Principle in the financial services segment are Motilal Oswal Financial Services, IIFL Finance and Edelweiss Financial Services.

Real estate firm Prestige Estates, media company TV18 Broadcast, auto component maker Sundaram Clayton and BPO company Hinduja Global Solutions are also in this list.

The club also has Welspun India, Finolex Industries, Redington (India), Jindal Stainless Ltd, Jindal Stainless (Hisar) Ltd, PNC Infratech, Supreme Petrochem, Gujarat Narmada Valley, and Indo Count Industries.