•The Peter Lynch Approach in Brief
•Philosophy and style
•Investment
in companies in which
there is a well-grounded expectation concerning the firm’s
growth prospects and
in which the stock can be bought at a reasonable
price.
•A thorough
understanding of
the company and its competitive
environment is
the only "edge" investors have over other
investors
in finding reasonably valued stocks.
•Universe of stocks
•All
listed and
over-the-counter stocks
- no restrictions.
•
•Criteria for initial consideration
•Select
from industries and
companies with which you are familiar and have an understanding
of the factors that will move the stock price.
•Make
sure you can
articulate a prospective stock’s "story line"-the company’s plans
for increasing growth and any other series of events that will help the
firm-and make sure you understand and balance them against any
potential pitfalls.
•Categorizing the
stocks among six major "story" lines is helpful when evaluating
prospective stocks.
•Criteria for initial consideration
•Specific
factors depend on the
firm’s "story," but these factors should be examined:
1.Year-by-year earnings: Look for stability
and consistency, and an upward trend.
2.P/E relative to historical average: The price-earnings
ratio should be in the lower range of its historical average.
3.P/E relative to industry average: The price-earnings
ratio should be below the industry average.
4.P/E relative to earnings growth rate: A price-earnings
ratio of half the level of historical earnings growth is attractive; relative
ratios above 2.0 are unattractive. For dividend-paying stocks, use the
price-earnings ratio divided by the sum of the earnings growth rate and
dividend yield-ratios below 0.5 are attractive, ratios above 1.0 are poor.
5.Debt-equity ratio: The company’s balance
sheet should be strong, with low levels of debt relative to equity financing,
and be particularly wary of high levels of bank debt.
6.Net cash per share: The net cash per
share relative to share price should be high.
7.Dividends and payout ratio: For investors seeking
dividend-paying firms, look for a low payout ratio (earnings per share divided
by dividends per share) and long records (20 to 30 years) of regularly raising
dividends.
8.Inventories: Particularly
important for cyclicals, inventories that
are piling up are a warning flag, particularly if growing faster than sales.
•Other favorable characteristics
•The name is boring, the product or
service is in a boring area, the company does something disagreeable or
depressing, or there are rumors of something bad about the company.
•The
company is a spin-off.
•The
fast-growing company is in a no-growth industry.
•The
company is a niche firm controlling a market segment.
•The
company produces a product that people tend to keep buying
during good times and bad.
•The
company can take advantages of technological advances, but is not a direct
producer of technology.
•The
is a low percentage of shares held by institutions and there is low
analyst coverage.
•Insiders are buying shares.
•The
company is buying back shares.
•
•Unfavorable characteristics
•Hot stocks in hot
industries.
•Companies
(particularly small firms) with big plans that
have not yet been proven.
•Profitable
companies engaged in diversifying
acquisitions. Lynch
terms these "diworseifications."
•Companies
in which one customer accounts for 25% to 50% of their sales.
•Stock monitoring and when to sell
•Do not diversify simply
to diversify, particularly
if it means less familiarity with the firms. Invest in whatever number of firms
is large enough to still allow you to fully research and understand each firm.
Invest in several categories of stock for diversification.
•Review holdings every few months, rechecking the
company "story" to see if anything has changed. Sell if
the "story" has played out as expected or something in the story
fails to unfold as expected or fundamentals deteriorate.
•Price drops usually should be viewed as an opportunity
to buy more of a good prospect at cheaper prices.
•Consider "rotation"-selling played-out
stocks with stocks with a similar story, but better prospects. Maintain a long-term
commitment to the stock market and focus on relative fundamental values.
•
No comments:
Post a Comment