Which large caps 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 characterised 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 large-cap space, we get a list of around 10 stocks with a market value of over Rs 20,000 crore that meet the filters combining fundamental and technical metrics.

This 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.

Indeed, six of the ten large-cap stocks are from the metals and mining industry. Add two from the oil marketing field and the list gets a deep commodity shade.

JSW Steel, India’s largest domestic steel producer, Tata Steel, India’s top steel company by global revenue, are in this pack. Mining giant Vedanta, state-run Steel Authority of India Ltd, mining firm NMDC, and Jindal Steel & Power are also part of this club.

State-run oil refining and marketing companies Indian Oil and Bharat Petroleum figure in the list, too.

The only outliers in the pack are telecom tower operator Indus Towers and drugmaker Cadila Healthcare.