Peter Lynch's Stock Picking Strategy

Peter Lynch's Stock Picking Strategy:

Peter Lynch loved story stocks. He once told a reporter for PBS' Frontline about his impetus for buying the stock of Hanes. Turns out the company was test-marketing a new product called L'Eggs in Boston. His wife brought home a sample and after wearing them raved about how great they were.

L'Eggs stole market share from cheap drugstore competitors, and Lynch eventually made it one of Magellan's biggest holdings. Eventually L'Eggs was bought by Consolidated Foods, which is now called Sara Lee (nyse: SLE - news - people ). Magellan fund-holders benefited from a 30-fold appreciation in Hane's stock.

In order to find stocks that Peter Lynch might buy today, Forbes used stock screening software available from American Association Individual Investors Stock Investor Pro service. Below is a list of the criteria used. You will note that Lynch avoided any stocks growing earnings per share faster than 50% because he liked to avoid hot companies with unsustainable earnings growth rates. He reasoned that they would attract too much attention, which would bid up the price and attract competitors.

--Companies in the financial sector or in real estate operations industry were excluded.

--A price-to-earnings ratio (P/E) less than the industry mean.

--A P/E less than the five-year average.

--The ratio of the P/E to the sum of the five-year growth rate in earnings per share and the five-year dividend yield (dividend adjusted PEG ratio) is less than or equal to 0.5%.

--The five-year growth rate in eps from continuing operations is less than 50%.

--The percentage of common stock held by institutions is less than the median percentage of institution ownership.

--The total liabilities to total assets ratio for the last fiscal quarter (Q1) is less than the industry's median total liabilities to total assets ratio for the same time period.

http://www.forbes.com/2009/02/23/lynch-fidelity-magellan-personal-finance_peter_lynch.html