Top 5 favorite stocks of Peter Lynch
“Invest to reap benefits in the long run, not to be slaves to never-ending profit maximisation
Oh, sorry to sound like I am talking in riddles. Well, in short, the above statement is what
Peter Lynch’s investment strategy is all about. Are you wondering who this investment legend
is and why are we talking about him? Well, worry not. We are always to your rescue with our
research and current updates.
We have started a series, wherein we would be discussing the stocks that your favorite investing guru’s would pick, we’ll use their screens to shortlist stocks for you!
“Peter Lynch” should ring a bell even to a stock market noob. Why do you ask? It is because
he is a legendary fund manager having a classic 13-year record of managing and
exponentially growing the assets of Magellan Fund. In Fidelity, he raised the fund to an
astonishing $18 billion in 1990 from $14 million in 1977. In these 13 years, Lynch’s strategical
investing helped the fund sustain itself among the highest-ranking stock funds, beating the
S&P 500, its benchmark, in 11 of these 13 years. He is a person closely honored and followed
besides Warren Buffet.
So, now you know whom we are talking about. Why wait for then? Let’s dive into his
investment strategies, how he categories companies and not just stocks, which type of stocks
to keep, which kind to avoid, how to research, and whatnot. Please don’t panic; we will cover
them systematically for you.
One of the primary things one should do is buy the stock they know. It doesn’t mean
purchasing any random stock, you know. It’s just the first step as it allows you to have the story started, some level of reliability and hope in the stock. Simple research follows this and can be done using your eyes, ears, and common sense. Sounds weird and illogical? Well, it is
the second logical step to take toward investing. You must have heard so much about
companies on your road trips, in the news, or while chatting with a group. They are first-hand
resources to collect some bits and pieces of the company and create a picture of its growth.
According to Lynch, even if you have this primary data about the company, it is not sufficient
to rely on them. You ask why? Come on, your money; your notes will be invested. Who would
like to go to the battleground without the sword and give themselves to the opponents?
When money is involved, it is better to research the company you wish to invest in thoroughly.
Peter then advices to stay with the company and not just stock for a longer time, till there is a fundamental change in the company. For example, corporate governance issues, high debt etc.
Through years of investment and management of funds, he believes that most companies can
be categorized as –
Slow Growers: Those old and aging companies that have almost reached their potential and
pay regular dividends. Investors can invest in these companies for dividends.
Stalwarts: Large companies with a growth rate of 10-12% and promising returns of not more
Fast Growers: These are highly risky, small aggressive companies that have promising annual
earnings growth between 20-25% in a year. They top Lynch’s favourites.
Cyclicals: Mostly from the auto, airlines, & steel industries, whose rise and fall of sales and
profits are highly predictable based on the economic cycle. They usually come with a
“notification signal” about the stock price.
Turnarounds: Lynch termed these as “no-growers” because many of them are of the pattern
of slipping into bankruptcy and being revived in time.
Asset Plays: Companies that have exuberant asset levels which are often overlooked by the
market. This type has the potential to self-revive in upset market cycles.
So, now you know how to classify your portfolio of stocks. Par Strategy toh sab batate hai, Stocks koi nahi batata! Par fikar not kyunki..
Lekin, Hum Bataenge
We have shortlisted some stocks that Peter Lynch would pick from the India markets, these are those companies that are growing at a steady rate, and high have low debt.
The criteria as suggested by Peter Lynch, for selection of stocks is that the stock should be a “Fast Grower” that has shown consistent profits, hasn’t quite been in the bucket list of many, has sustained a relatively low Debt-to-Equity ratio, and has a decent price with moderate growth rate for a fixed period.
1. Mindtree Ltd. (IT-Software):
Currently trading at Rs. 2,811, it is one of the fast growing global info-tech consulting and implementation companies that strives to deliver solutions to worldwide problems through software development. Surprisingly, even if the company has shown astonishingly consistent compounded profit growth (TTM) of 49%; the stock is yet to be on the radar of the market. It has a high EPS of Rs. 100.00. Although according to Lynch, a stock having an EPS greater than 15 is considered one of the best pick stocks, an EPS of nearly 100 reflects high earning potential of the company. This company has a reasonable amount of debt of Rs. 556 Cr., and has an amazing debt-to-equity ratio of 0.10, which is a good indicator of the company's fundamentals. Additionally, this stock has a PEG (Price/Earnings-to-growth) ratio of 0.89, which according to Lynch, helps it come under the good books of investors.
2. Bosch Ltd. (Auto Ancillary):
It is a global manufacturer and trader of products like diesel, gasoline fuel injection systems, and other automotive parts and fixtures that have witnessed a growing demand lately. This stocks’ presence is not limited to Automotive technology as it has its establishments in industries like industrial, consumer goods, energy, and building. Not very surprisingly, the stock is trading at a humongous price level of Rs. 13,566. Although, compared to its close competitors like Motherson Sumi, trading at 117.70, and Exide Industries, trading at 138.50, we see that the stock is already a premium buy for most investors, although, the share is a bit pricey, but if you look at the valuations, it is currently trading at P/E of 32, which is quite less when compared with its peers like Motherson Sumi, Minda Industries which are trading at P/E of 59 and 70 respectively. Even after being into the automobile sector, the stock has an exciting Debt-to-Equity ratio of 0.01; which portrays the inherent strength and potential to manage operations and grow through consistent performance levels.
3.Deepak Nitrite Ltd. (Chemicals):
It is one of the fast growing chemical manufacturing companies in India, located across Gujarat, Maharashtra, & Telangana. It specializes in the manufacturing of organic, inorganic, as well as fine, & special chemicals demanded globally. Intermediaries required in the paints, optical brighteners, industrial explosives and others are also manufactured and sold by this company Pan India. Deepak Nitrite has a strong P/E of 23.6. According to Peter Lynch, a low P/E indicates that the stock is undervalued and thus has a scope of showing excellent performance in the long run.
4. Info Edge (India) Ltd. (BPO/ITeS):
An almost omnipresent company in people's daily lives. How? Well, it is an umbrella company to many online educational, matrimonial, and real estate organizations like naukri.com, jeevansathi.com, 99acres.com, as well as shiksha.com. And at least one of these companies might have been part of your lives at some point, isn’t it?. Peter Lynch suggested a lower Debt-to-Equity ratio as an expression for the company’s management of operations through debt and equity. Info Edge (India) Ltd is almost a debt-free company. Companies with lower dependence on debt and equity represent a strong cash flow and reliance on their establishment and position in the market. However, quite shockingly its EPS is at a massive level of Rs. 991. The current PEG ratio of Info Edge (India) Ltd is 0.14. Although, according to categorisation by Peter Lynch, a PEG of less than 1 is lucrative stock for investors. This can be understood because PEG is the price of stock/Growth. Hence, a lower ratio can only come when Price<Growth, suggesting that there are growth opportunities still uncovered.
5. Tanla Platforms Ltd. (IT - Software):
Well, the final pick is another one from the IT industries. Tanla Platforms is one of the leading cloud communications providers with an excellent niche in providing competitive business with facilities like A2P (application to person) platforms. The company’s stock is trading at a P/E of 27, lower than its peers KPIT and Happiest minds, which are trading at a P/E of 46 and 69 respectively. This shows that it isn’t one of the top performers in this domain but is slowly catching up with the market; a fine pick for investors. Its P/E is at 27.13, slightly greater than 15, hence great for investment.
The specifics of Peter Lynch’s investment calculations have been displayed through
applications on real-time stocks.
So, now you know how Peter Lynch created his fame through strategical investment. And you
have the tips and tricks as elaborated by Peter Lynch himself in his famous book- “One Up on
Wall Street and Beating the Street”. So, what are you waiting for? Go, and start investing.
Stay tuned to 5paisa Capital limited for more intriguing and brewing content. See you on the
DisclaimerInvestment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.
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