Warby parker (WRBY): Company that has interrupted the glasses monopoly in the US.
Beyond Meat (BYND): Producers of vegan burgers.
Oatly (OTLY): Oat drink producers.
Adyen (ADYEN): Company specialized in digital payment processing.
Shimano (7309): Producer of premium bicycle parts.
Airbus (AIR): manufacturer of civil and military aerospace vehicles.
Of course, not all of these companies will pass the fundamentals test, and some of them are already pretty well covered. But the idea here is to show you that there are many interesting "stories" that derive directly from individual observations. And with Lynch's stock investing criteria in hand, we now have all the tools and "knowledge" to start using his method today.
Peter Lynch is a management legend whose stock investment fund Magellan It has returned investors an average of 29% annual returns, more than any other fund in the US. It has achieved its success in part thanks to its stock investment strategy. In fact, Peter believes we already have the secret to a winning investment: we just need to know how…
What is Lynch's stock investment strategy?
Lynch, like Warren Buffett, recommends investing in stocks in industries we know. Therefore, his strategy is simple: we start with what we know or what we care about, and work from there. Maybe we are specialists in an industry, loyal followers of a brand, or we have noticed a product or service that we believe is head and shoulders above the competition. Chances are, if we are fans of the company as consumers, others will be too.
6 types of investing in shares by Peter Lynch. Source: Trade Brains
Ultimately, Lynch believes every stock investment starts with a great story. So this is where we start: we must discover the history of the company we chose, its position in its industry, its growth prospects, its competitive advantages and its biggest challenges. Next, Lynch says we're going to want to put that company under the microscope with a couple of tests.
1st Test: review Lynch's checklist✍️
Lynch has observed that the best companies possess at least some of the following characteristics: ☑️The company is growing rapidly in a boring or low-growth industry. They are probably undervalued as they have fallen off investors' radars. ☑️The company is growing steadily. We're not just looking for speed of growth: we're looking for double-digit earnings growth year over year for several years. ☑️The company is a leader in a niche segment. This makes it difficult for competitors to get their foot in the door, meaning the best companies tend to boast high, stable margins. ☑️The company is growing rapidly in a boring or low-growth industry. They are probably undervalued as they have fallen off investors' radars. ☑️The company is growing steadily. We're not just looking for speed of growth: we're looking for double-digit earnings growth year over year for several years. ☑️The company is a leader in a niche segment. This makes it difficult for competitors to get their foot in the door, meaning the best companies tend to boast high, stable margins. ☑️The company is being ignored by analysts and Wall Street institutions. That may be the sign of a hidden gem. ☑️The company is relatively small. As Lynch says: "Big companies have small moves, small companies have big moves." ☑️Company insiders are buying their shares. It's usually a good sign that they believe in the future of the company, based on the information they have and you don't.
Magellan fund growth comparison vs S&P500. Source: Inbestia
2nd Test: Check the weak points Company 啕
On the other hand, Lynch recommends avoiding signatures with these characteristics: ❌Hot companies in hot industries. They're probably getting too much attention. ❌Young companies with big unproven plans. They are the most likely to disappoint. ❌Companies dedicated to “inefficient diversification”. Buying companies left and right is unlikely to add much value in the future. ❌Companies with too much focus on one product or one customer. They are too risky. Now, this is just a general guideline. After all, it is unlikely that the company analyzed meets each of the points. But if the company seems to at least partially fit Lynch's criteria, let's move on to the third test...
Magellan fund stock investment portfolio from October 2019. Source: Seeking Alpha
3rd Test: Evaluate the fundamentals of the company
Lynch recommends making sure of a few things: 1. La price-earnings ratio (P/E) does not trade much higher than its peers. If the company is above, we can operate at a reasonable premium. But we must make sure that it is really reasonable. 2. P/E ratio is not trading too high compared to its own history. Ideally, we want to buy when a market decline pushes the ratio below its historical average. (which is happening among many companies right now). 3. Let it have a solid balance: The debt-to-equity ratio is low (less than 1) and the company has a strong net cash position per share. 4. Check that it is not facing warning signs of industry-specific metrics. We should be careful if a cyclical company has a backlog of shares it can't get rid of, because it could hurt us investors.
Types of financial ratios. Source: Pareto Labs
What is the advantage of Lynch's approach?
What we like about this approach is that it gives retail investors an advantage over professionals. By being observant and using area-specific knowledge, we can identify trends sooner than most investors. And as a retail investor, we have the flexibility to invest in smaller, lesser-known businesses that are more likely to be undervalued. Plus, it doesn't require us to develop complicated new skills: if we have a passion or a job, we're already in a good position to spot some of those opportunities. For example, we have made a diversified stock investment list such as:
Coinbase (COIN): Cryptocurrency custody and trading service for institutional investors.
Warby parker (WRBY): Company that has interrupted the glasses monopoly in the US.
Beyond Meat (BYND): Producers of vegan burgers.
Oatly (OTLY): Oat drink producers.
Adyen (ADYEN): Company specialized in digital payment processing.
Shimano (7309): Producer of premium bicycle parts.
Airbus (AIR): manufacturer of civil and military aerospace vehicles.
Of course, not all of these companies will pass the fundamentals test, and some of them are already pretty well covered. But the idea here is to show you that there are many interesting "stories" that derive directly from individual observations. And with Lynch's stock investing criteria in hand, we now have all the tools and "knowledge" to start using his method today.