Slow Growers

SLOW GROWERS

Traits
• Usually large and aging companies, whose
Growth rate = GNP Growth rate
• When industries slow down, most companies
lose momentum as well
• Easy to spot using stock charts
• Pay large and regular dividends
• Bladder theory of corporate finance: the
more cash that builds up in the treasury,
the greater the pressure to piss it away.
Companies that don’t pay dividends, have a
history of diworseification.
• Stocks that pay dividends are favoured vs
stocks that don’t. Presence of dividend
creates a floor price, keeping a stock from
falling away during market crashes. If
investors are certain that the high dividend
yield will hold up, then they’ll buy for the
dividend. This is one reason to buy Slow
Growers and Stalwarts, since people flock to
blue chips during panic.
• If a Slow Grower stops dividend, you’re
stuck with a sluggish company with little
going for it.

Examples
• GE, Alcoa, Utilities, Dow Chemical

People Examples
• Secure jobs + Low salary + Modest raises =
Librarians, Teachers, Policemen

PE Ratio
• Lowest levels, per PEG. Utilities = 7-9x
• Bargain hunting doesn’t make sense without
growth or other catalyst
• During bull market optimism, PE may
expand to Fast Growers’ PE of 14-20x
• Therefore, the only meaningful source of
return = PE re-rating

2 Minute Drill
• Reasons for interest?
• What must happen for the company to
succeed?
• Pitfalls that stand in the path?
• Dividend Play = “For the past 10 years the
company has increased earnings, offers an
attractive dividend yield, it’s never reduced/
suspended dividend, & has in fact raised it
during good and bad times, including the
last 3 recessions. As a phone utility, new
cellular division may aid growth.”

Checklist
• Dividends: Check if always paid and raised.
• Low dividend payout ratio creates cushion,
higher % is riskier.

Portfolio Allocation %
• 0% - NO Allocation, because without growth,
the earnings & price aren’t going to move.
Risk/Reward
• Low risk-Low gain, because Slow Growers
aren’t expected to do much and are priced
accordingly.

Sell When
• After 30-50% rise
• When fundamentals deteriorate, even if price
has fallen:
o Lost market share for 2 Quarters and
hires new advertising agency
o No new products/R&D, indicating that
the company is resting on its laurels
o Diworseification (>2 recent unrelated
M&A’s), excess leverage leaves no room
for buybacks/dividend increase
o Dividend yield isn’t high enough, even at
a lower price.

The Peter Lynch Playbook

Twitter@mjbaldbard 2 mayur.jain1@gmail.com

The Growth Stocks of Peter Lynch

Peter Lynch

From 1977 through his retirement in 1990, Peter Lynch steered the Fidelity Magellan Fund to a total return of 2,510%, or five times the approximate 500% return of the Standard & Poor's 500 index. In his 1989 book One Up on Wall Street, Lynch described a variety of strategies that individual investors can use to duplicate his success. These strategies divide attractive stocks into different categories, each characterized by different criteria. Among those most easy to identify using quantitative research are fast growers, slow growers and stalwarts, with special criteria applied to cyclical and financial stocks. (The latter, for example, should have strong equity-to-assets ratios as a measure of financial solvency.)

Peter Lynch's Company Categories:

Fast Growers

These companies have little debt, are growing earnings at 20% to 50% a year, and have a stock price-to-earnings ratio below the company's earnings growth rate.

Investing in these types of stocks makes sense for investors who want to find solidly financed, fast-growing companies at reasonable prices.

Slow Growers

Here Lynch is looking for companies with high dividend payouts, since dividends are the main reason for investing in slow-growth companies.

Among other things, he also requires that such companies have sales in excess of $1 billion, sales that generally are growing faster than inventories, a low yield-adjusted price/earnings-to-growth ratio, and a reasonable debt-to-equity ratio.

Investing in these types of stocks makes sense for income-oriented investors.

Stalwarts

Stalwarts have only moderate earnings growth but hold the potential for 30%-to-50% stock price gains over a two-year period if they can be purchased at attractive prices. 

Characteristics include positive earnings; a debt to equity ratio of .33 or less; sales rates that generally are increasing in line with, or ahead of, inventories; and a low yield-adjusted price/earnings-to-growth ratio. 

Investing in these types of stocks makes sense for investors who aren't willing to pay up for high-growth companies but still want the chance to enjoy significant capital gains.

Read more: http://www.nasdaq.com/investing/guru/guru-bios.aspx?guru=lynch#ixzz2fsOsMVsc

Peter Lynch's 6 categories of stocks: Summing it up

Summing it up

That wraps up our practical introduction to Peter Lynch's six stock categories;

• slow growers (sluggards), 
• medium growers (stalwarts), 
• fast growers, 
• cyclicals, 
• turnarounds and 
• asset plays. 

These are only a guide, as companies won't always fit neatly into a single category, and the same company may move through several categories over the course of its life.

The biggest risk for investors is mis-categorising a stock.Buying a stock which you think is a fast grower, for example, only to find out a couple of years down the track that it is really a cyclical, is a chastening experience. And your own life situation and risk tolerance should dictate the weightings of each category in your portfolio.

If you've found these distinctions helpful, you might find it worthwhile heading to the source, Lynch's easy-to-read One Up on Wall Street.


Click:

Peter Lynch's 6 categories of stocks: Sluggards and Stalwarts

Peter Lynch's 6 categories of stocks: Fast Growers

Peter Lynch's 6 categories of stocks: Cyclical Stocks

Peter Lynch's 6 categories of stocks: Turnaround Stocks

Peter Lynch's 6 categories of stocks: Asset Plays

Peter Lynch's 6 categories of stocks: Summing it up

Peter Lynch's Classification of Companies

There are different ways of classifying shares. Here is Peter Lynch's classification of companies (and by derivation, shares).

Slow growers: Large and ageing companies that are expected to grow slightly faster than the gross national product.

Stalwarts: Giant companies that are faster than slow growers but are not agile climbers.

Fast growers: Small, aggressive new enterprises that grow at 10 to 25% a year.

Cyclicals: Companies whose sales and profit rise and fall in a regular, though not completely predicatable fashion.

Turnarounds: Companies which are steeped in accumuated losses but which show signs of recovery. Turnaround companies have the potential to make up lose ground quickly.