Once an excellent source of consistent outperforming ideas and alpha, our Genuine Growth screen has fallen back sharply after consecutive dismal outings. The last time we dropped in on its performance it was heading for a severe 29 per cent total loss on 2021’s selections. Given the backdrop of the past 12 months – which is to say a slightly less precipitous sell-off in UK equities – 2022’s cohort was arguably even worse.

The 10 shares that made the cut a year ago collectively returned a 24 per cent total loss in the year to 14 November, a considerable underperformance of both the growth-oriented Aim 100 index and the core benchmark for UK equities, the FTSE All-Share. This dragged the screen’s all-time total return down to 88 per cent, compared with 100 per cent from the FTSE All-Share and 28 per cent from the FTSE Aim 100.

In fact, that’s sugar-coating it. While the screens run in this column are meant as a source of ideas rather than off-the-shelf portfolios, our Genuine Growth screen’s cumulative return drops to 59 per cent once a notional annual charge of 1.5 per cent to account for real-world dealing costs is included.

So what’s happened? Let’s start with one of the issues we highlighted last time around: the tendency of stocks with strong earnings growth to attract meaty valuations. When shares get the ‘growth’ label, a business often must run harder just to meet higher earnings expectations and justify its valuation. Slip-ups mean sharp stock falls. 

That was the story of three of the five 2022 Genuine Growth stocks with the highest forward price/earnings (PE) multiples – healthcare services group Uniphar (UPR), digital consultancy Kin+Carta (KCT) and workplace digital education outfit Learning Technologies (LTG) – although in the case of the latter two, falling sales compounded the decline.

Of course, no screen (or investor) can hope to weed out every issue ahead of time. NatWest (NWG) – which did manage to grow net income during the period – nevertheless succumbed to a corporate governance meltdown, sending its shares down 16 per cent in the process. As for games developer TinyBuild (TBLD), it’s clear investors have completely lost faith in the business and lack a clear way of valuing the stock following a major profit warning in June.

Another possible fault of the screen is that it arguably requires a lack of investor faith. By insisting on a price/earnings growth (PEG) ratio in the bottom half of the market, the Genuine Growth methodology likes to counterbalance growth with cheapness. And when it works well, the PEG ratio is a great tool for spotting rising profits that the rest of the market appears to have missed.

But a low PEG ratio, like a low PE multiple, is a double-edged sword. If the market has doubts about the resilience of a company’s earnings, it won’t always show up in the multiple. Expectations and guidance are maintained until they suddenly aren’t.

Equally, metrics matter little when investors have completely written off an investment case. Take another one of last year’s duds – oil and gas producer EnQuest (ENQ) – which after posting a total loss of 40 per cent in the period now trades at just over one times expected earnings for the coming 12 months. Of course, lots of operators and investors won’t touch the North Sea with a barge pole. But with its debt pile finally thinning, and production on its major Kraken field holding up, it’s hard to see how EnQuest wouldn’t be priced at multiples of its current valuation if it were just one small piece of a much larger energy major.

2022 performance
Name	TIDM	Total Return (22 Nov 2022 – 14 Nov 2023)
Network International	NETW	19.7
Standard Chartered	STAN	9.4
Coats	COA	6.1
Weir	WEIR	2.1
Natwest	NWG	-16.1
Uniphar (Lon)	UPR	-34.7
Learning Technologies	LTG	-38.6
Enquest	ENQ	-40.3
Kin+Carta	KCT	-57.5
Tinybuild	TBLD	-93.1
FTSE All-Share	–	2.8
FTSE Aim 100	–	-13.8
Genuine Growth	–	-24.3
Source: LSEG

Why then, you might well ask, was the screen able to do so well for so long? After all, PEGs were PEGs three years ago, when long-term returns were still strong.

I think the answer lies in two sources: the aforementioned ‘quality’ of earnings, and the high bar the screen asks companies to clear. When profits are susceptible to a greater number of risks – be they inflation, unreadable customer sentiment, interest rates or management overconfidence – then it becomes trickier for companies to deliver the goods. So, too, if analyst expectations are very high, which the screen requires with reference to its forward earnings per share (EPS) growth tests.

This year, two stocks from the FTSE Aim 100 and five from the All-Share passed all tests.

On the face of it, while there are some high-flying names in this year’s screen – see alternative asset manager Intermediate Capital (ICP) and the phoenix-like middle-class high-street fave Marks & Spencer (MKS) – a couple of fundamentals give me pause for thought. On average, while these stocks’ forward earnings expectations have climbed by 28 per cent over the past 12 months, the market isn’t really buying that optimism, and the average forward PE stands at 11 (the average PEG ratio is 0.8).

None of this means we are destined to see a repeat of the past two years. Ultimately, the screen’s near-term fortunes come down to sentiment towards UK stocks that often look very cheap, and sometimes with good reason. A soft landing for the global economy could really put the burners on. On the other hand, quite how well a grab-bag of stocks weighted to financial services and retail will fare may depend on the depth of a recession in 2024, if it does come.

For those mindful of a more middling outlook for the UK, the wider geographical focus of polling group YouGov (YOU), Intermediate Capital and Standard Chartered (STAN) – which has repeatedly been singled out as a potential takeover situation – should offer some reassurance.

Details are included in the table below, while a longer list with fundamentals can be found in the attachment, here:

Name	TIDM	Mkt Cap	Net Cash / Debt(-)*	Price	Fwd PE (+12mths)	Fwd DY (+12mths)	FCF yld (+12mths)	FCF yld	PEG	Op Cash/ Ebitda	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR	Fwd EPS grth NTM	Fwd EPS grth STM	3-mth Mom	12-mth Mom	3-mth Fwd EPS change%	12-mth Fwd EPS change%	Index
Rathbones	RAT	£1,479mn	£1,036mn	1,634p	11	5.6%	5.5%	–	0.5	93%	–	11.4%	10.5%	-2.1%	28%	15%	-4.8%	-20.7%	7.2%	14.5%	FTSE All-Share
Standard Chartered	STAN	£16,721mn	-£33,567mn	627p	5	3.8%	–	–	0.5	–	–	–	4.4%	30.7%	28%	16%	-16.5%	8.7%	1.3%	22.8%	FTSE All-Share
Intermediate Capital	ICP	£4,227mn	-£5,233mn	1,455p	11	6.0%	4.9%	5.6%	0.4	71%	–	3.8%	14.0%	2.0%	35%	12%	7.6%	17.1%	8.5%	26.3%	FTSE All-Share
Marks and Spencer	MKS	£5,001mn	-£2,454mn	254p	11	2.3%	6.8%	4.8%	0.9	72%	5.7%	8.2%	2.2%	64.6%	14%	9%	23.8%	102.4%	22.5%	57.5%	FTSE All-Share
Frasers	FRAS	£3,843mn	-£1,097mn	848p	9	–	–	–	0.6	91%	6.1%	11.7%	10.6%	92.4%	15%	12%	5.5%	7.5%	2.4%	17.5%	FTSE All-Share
YouGov	YOU	£1,177mn	£96mn	1,005p	21	1.0%	4.6%	3.8%	1.5	91%	18.4%	27.6%	17.3%	32.4%	17%	25%	6.9%	4.4%	8.0%	29.8%	Aim 100
Volex	VLX	£537mn	-£84mn	296p	10	1.3%	4.3%	3.9%	1.0	77%	7.5%	16.9%	19.8%	42.2%	17%	14%	-11.6%	5.0%	12.3%	26.8%	Aim 100
Source: FactSet. *FX converted to £. NTM = Next 12 months. STM = Second 12 months (ie one year from now)