When you buy into stocks you need to understand why you are buying. In doing this, it helps to categorise the company in determining what sort of returns you can expect. Catergorising also enforces some discipline into your investment process and aids effective portfolio construction.
Peter Lynch uses the six categories below;-
• Sluggards (Slow growers) – Usually large companies in mature industries with earnings growth below or around GDP growth. Such companies are usually held for dividend rather than significant price appreciation.
• Stalwarts (Medium growth) - High quality companies such as Coca-Cola, P&G and Colgate that can still churn out high single digit/low teens growth. Earnings patterns are not cyclical meaning that these stocks will protect you recession.
• Fast growers – Companies whose earnings are growing at 20%+ and have plenty of runway to attack e.g. think Google, Apple in their early days. It doesn’t have to be a company as “sexy” as those mentioned.
• Cyclicals – Companies whose fortunes are closely linked to the economic cycle e.g. automobiles, financials, airlines.
• Turn-arounds – Companies coming out of a depressed phase as a result of change in management, strategy or corporate restructuring. Successful turnarounds can deliver stunning returns.
• Asset plays – Firm has hidden assets which are undervalued or not recognized at all on the balance sheet or under appreciated by the market e.g. cash, land, property, holdings in other company.
Comment:
General observations about different types of stocks.
Wall Street does not look kindly on fast growers that run out of stamina and turn into slow growers and when that happens the stock is beaten down accordingly.
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