Skip to content

Trending News

Exclusive
9 hours agoChimera Investment (CIM) Q2 2022 Earnings Call Transcript 9 hours agoBoost your ecommerce strategy with these 10 affiliate marketing tips 10 hours agoSenate GOP Blocks Insulin Price Cap For Private Insurance As Democrats Aim To Pass Economic Bill 10 hours ago4 Content Marketing Frameworks To Add Structure to Your Strategy 11 hours agoERP System: The Basics of ERP
Tuesday, Aug 9, 2022
hollywoodstarshoney hollywoodstarshoney

Long Life Business

Aug 9 2022

Chimera Investment (CIM) Q2 2022 Earnings Call Transcript

Nov 1 2018

Clothes

Nov 1 2018

Systemwide Enterprise & Finance

Nov 1 2018

Detailing House Improvement Initiatives At #bayberryhouse

Nov 1 2018

Vive Healthy Sport And Nutrition

Jan 1 2019

Enterprise

Primary Menu
  • Business Management
  • Business Analysis
  • Business Banking
  • News Business
  • Insurance
  • About Us
    • Contact Us
    • Advertise Here
    • Privacy Policy
    • Sitemap
  • Home
  • 25 Stocks Former Wall Street Investment Manager Peter Lynch Would Like

25 Stocks Former Wall Street Investment Manager Peter Lynch Would Like

Posted On : May 27, 2022 Published By : Patricia A. Eldridge

Table of Contents

  • 13 Tips From Renowned Stock-Picker Peter Lynch
  • Short-Term Pain for Long-Term Success

.

This week, we present the strategy used by the fund manager Peter Lynch. His approach capitalizes on the distinct advantage individual investors have over Wall Street and large money managers. Read on for how we identify stocks possessing the key characteristics Lynch looks for when selecting stocks and 25 current stock ideas from our Lynch screen.

13 Tips From Renowned Stock-Picker Peter Lynch

Peter Lynch offered investors deep insight in his book One Up on Wall Street. Lynch was careful to warn his readers that it was essential to first analyze oneself before spending any time analyzing companies. Lynch even provided in his bestselling book a list of the most important qualities it takes to succeed:

Related Posts:

  • rakesh jhunjhunwala stocks: Big Movers on D-St: What should investors do with Info Edge, Rakesh Jhunjhunwala-owned stock and Chola Investment?
  • Patience
  • Self-reliance
  • Common sense
  • Tolerance for pain
  • Open-mindedness
  • Detachment
  • Persistence
  • Humility
  • Flexibility
  • Willingness to do independent research
  • Willingness to admit mistakes
  • Ability to ignore general panic
  • Discipline to resist your human nature and your gut feeling

You may be surprised that items such as humility, tolerance for pain and common sense are on Lynch’s personality checklist, but not intelligence. Lynch felt that the behavior of stocks is generally simple-minded, and true geniuses get too “enamored of theoretical cogitations and are forever betrayed by the actual behavior of stocks.”

Lynch further noted that investors need to accept that they will have to make decisions without complete or perfect information. One is rarely sure when making investment decisions, and if one completely understands what is going on, it is already too late to profit.

Lynch gained his fame as the portfolio manager of the Fidelity Magellan mutual fund, which he took control of in 1977. During his 13-year tenure as portfolio manager, he grew its asset base from $20 million to $14 billion and beat the S&P 500 in 11 out of 13 years, with a 29.2% average annual rate of return.

Lynch strongly believes that individuals can succeed at investing and have a distinct advantage over Wall Street and professional money managers. In Lynch’s opinion, individual investors can identify trends early, invest in what they know, have the flexibility to invest in a wide array of companies and aren’t evaluated on a short-term basis.

Short-Term Pain for Long-Term Success

Stock market volatility reminds us that long-term stock market success requires a certain detachment and tolerance for short-term pain. As Lynch pointed out, stocks will go up and down, and rather than panic when they go down, you must have the detachment to stay the course. Lynch warned investors, “when you sell in desperation, you always sell cheap.”

AAII has developed a quantitative stock filter, or stock screen, to identify stocks possessing the fundamental characteristics Lynch looks for when selecting stocks. We present 25 Lynch-inspired prospects below. Our Lynch screening model has shown impressive long-term performance, with an average annual gain since 1998 of 7.7%, versus 5.9% for the S&P 500 index in the same period.

Stocks Passing the Lynch Screen (Ranked by Dividend-Adjusted PEG Ratio)

American Association of Individual Investors

Lynch was a bottom-up stock-picker who looked for good companies selling at attractive prices. He did not focus on the market’s direction, the economy or interest rates. Lynch said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” It wasn’t that he didn’t understand the importance of these big-picture elements. However, he did not believe that it was possible to forecast them in any bankable way consistently. Instead, he felt it was better to spend your time looking for superior companies, doing fundamental research and keeping a close eye on the fundamentals of your holdings.

Analysis is central to Lynch’s approach. In examining a company, he seeks to understand the firm’s business and prospects, including any competitive advantages, and evaluate potential pitfalls that may prevent the favorable “story.” Also, an investor cannot make a profit if they purchase the stock at a too-high price. For that reason, he also seeks to determine reasonable value. Here are some of the critical numbers Lynch suggests investors examine:

Sustainable Earnings Growth

The earnings growth rate should fit with the firm’s “story”—fast-growers should have higher growth rates than slow-growers. Extremely high earnings growth rates are not sustainable, but continued high growth may be factored into the price. A high level of growth for a company and industry will attract much attention from investors, who bid up the stock price, and competitors, who provide a more challenging business environment.

Lynch prefers to invest in companies with earnings expanding at moderately fast rates (20% to 25%) in non-growth industries. AAII’s Lynch-inspired strategy excludes companies whose average annual growth rate in earnings per share over the last five years is greater than 50% to avoid companies whose earnings growth is not sustainable in the longer term.

Price-Earnings Ratio

The earnings potential of a company is a primary determinant of company value. At times, the market may get ahead and even overprice a stock with excellent prospects. The price-earnings ratio helps to keep your perspective in check. The ratio compares the current price to the most recently reported earnings. Stocks with good prospects should trade at higher price-earnings ratios than stocks with poor prospects.

By studying the pattern of price-earnings ratios over several years, you can develop a sense of the normal level for the company. This knowledge should help you avoid buying into a stock if the price gets ahead of the earnings or send you an early warning that it may be time to take some profits in a stock you own. Conversely, if a company does everything well, you may not make any money on the stock if you pay too much.

The AAII Lynch approach specifies that a company’s current price-earnings ratio be lower than its own five-year average price-earnings ratio. Implicit in this filter is that a company must have five years of positive earnings and five years of price data.

Comparing a company’s price-earnings ratio to the industry may help reveal whether the company is a bargain. At a minimum, it leads to questions as to why the market is pricing the company differently. Lynch’s ideal investment is a neglected niche company that controls a market segment in an unglamorous industry in which it would be difficult and time-consuming for another company to compete. Therefore, the AAII Lynch screen requires that the company have a price-earnings ratio lower than the median for its respective industry.

Growth at a Reasonable Price

Companies with better prospects should sell with higher price-earnings ratios. A useful valuation technique compares the price-earnings ratio to the earnings growth called the PEG ratio. A price-earnings ratio of half the level of historical earnings growth is considered attractive, while ratios above 2.0 are considered unattractive.

Lynch refines this measure by adding the dividend yield to earnings growth. This adjustment acknowledges the contribution that dividends make to an investor’s return. Analysts calculate the ratio by dividing the price-earnings ratio by the sum of the earnings growth rate and the dividend yield. With this modified technique, ratios above 1.0 are considered poor, while ratios below 0.5 are considered attractive. The AAII Lynch screen uses this dividend-adjusted PEG ratio, with a ratio less than or equal to 0.5 specified as a cutoff.

Strong Balance Sheet

A strong balance sheet provides maneuvering room as the company expands or experiences trouble. Lynch is especially wary of bank debt, which the bank can usually call in on demand. Small-cap stocks have a more difficult time raising capital through the bond market than larger stocks and often turn to banks for capital. A close examination of the financial statements, especially in the notes to the financial statement, should help to reveal the use of bank debt.

The AAII Lynch approach ensures that the company’s total-liabilities-to-assets ratio is below its industry norm. The screen uses total liabilities because it considers all forms of debt. It compares the company’s ratio against industry levels because acceptable levels vary from industry to industry. For example, normal debt levels are higher for industries with high capital requirements and relatively stable earnings, such as utilities.

Also, the AAII Lynch screen excludes firms in the financial sector because their financial statements cannot be directly compared to non-financial firms.

Institutional Ownership

Lynch feels that the bargains are located among the stocks neglected by Wall Street. The lower the percentage of shares held by institutions and the lower the number of analysts following the stock, the better. The AAII Lynch strategy requires a lower percentage of shares held by institutions than the median of all U.S.-listed stocks.

Portfolio Building and Monitoring

Lynch says investors should buy as many “exciting prospects” as they can uncover that pass all the research tests. However, there is no point in diversifying just for the sake of diversifying. Lynch suggests investing in several categories of stocks to spread the downside risk.

Although Lynch advocates maintaining a long-term commitment to the stock market, he says investors should review their holdings every few months, rechecking the company “story” to see if anything has changed either with the unfolding of the story or with the share price. The key to knowing when to sell, he says, is knowing “why you bought it in the first place.” Lynch says investors should sell if the story has played out as expected, and the price reflects this—for instance, the price of a stalwart has gone up as much as could be expected. Another reason to sell is if something in the story fails to unfold as expected, the story changes or fundamentals deteriorate. For instance, a cyclical’s inventories start to build, or a smaller firm enters a new growth stage.

For Lynch, a price drop is an opportunity to buy more of a good prospect at lower prices. It is much harder, he says, to stick with a winning stock once the price goes up, particularly with fast growers where the tendency is to sell too soon rather than too late. With these firms, he suggests holding on until the firm is entering a different growth stage.

Rather than simply selling a stock, Lynch suggests “rotation”—selling the company and replacing it with another company with a similar story but better prospects. The rotation approach maintains the investor’s long-term commitment to the stock market and keeps the focus on fundamental value.

___

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

If you want an edge throughout this market volatility, become an AAII member.

Posted in: InvestmentTagged : Amazon Business Credit Card,American Airlines Business Class,Att Business Login,Austin Business Journal,Best Bank For Small Business,Best Business Bank Accounts,Best Business Schools In Us,Best Business To Start,British Airways Business Class,Business Attire Men,Business Card Ideas,Business Casual Shoes For Women,Business Continuity Planning,Business Entity Search,Business Letter Template,Business Management Degree,Business Manager Facebook,Business Plan Outline,Business School Rankings,Colorado Business Search,Delaware Business Entity Search,Drop Shipping Business,Family Business Bet,Fox Business Live,Georgia Sos Business Search,Google Business Account,Harvest Small Business Finance,How To Build Business Credit,Is Saturday A Business Day,Is Sears Still In Business,Microsoft 365 Business,My Business Google,Name Generator Business,None Of Your Business,Ny Sos Business Search,Open A Business Bank Account,Pa Business Search,Plus Size Business Casual,Pnc Business Banking,Sos Business Search Ca,Sunbiz Business Search,Taking Care Of Business,The Business Of Being Born,Turbotax Home And Business 2020,Tx Sos Business Search,Venmo For Business,Verizon Business Plans,Virtual Address For Business,What Are Business Days,Women Business Casual

Post navigation

Three Ways Business Leaders Can Approach Stress Management
Opinion: Broadcom will let VMware shop for another buyer, but is any other software company interested?

Categories

  • Business Analysis
  • Business Banking
  • Business Management
  • Insurance
  • Investment
  • News Business

Archives

  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • March 2020
  • January 2019
  • November 2018

Recent Posts

  • Chimera Investment (CIM) Q2 2022 Earnings Call Transcript
  • Boost your ecommerce strategy with these 10 affiliate marketing tips
  • Senate GOP Blocks Insulin Price Cap For Private Insurance As Democrats Aim To Pass Economic Bill
  • 4 Content Marketing Frameworks To Add Structure to Your Strategy
  • ERP System: The Basics of ERP

Visit Now

Micron Technology

BL

TL

Intellifluence Trusted Blogger

promo toyota malang

water damage restoration las vegas

hollywoodstarshoney.com All rights reserved
Theme: Royal Magazine by ThemeinWP
This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Cookie settingsACCEPT
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Non-necessary
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
SAVE & ACCEPT