Peter Lynch is a famous fund manager who managed the Magellan Fund at Fidelity Investments who gave 29.2% return over a period of 13 years; his assets under management increased from $18 million to $14 billion at the end of his tenure.
He is also the author of three famous investing books which everyone should read
- One up on Wall Street.
- Learn to earn.
- Betting the street.
The term multi-baggers was coined by Peter Lynch.
In this book One Up On The Wall Street he described 6 types of stock or businesses to invest in the stock market – By Peter Lynch.
6 types of stock categories by Peter Lynch
1. Slow growers
Slow growers are the company who grow at a very slow pace well below the market average and also provide a very low return.
All fast growers eventually become slow growers.
The type of these stocks can provide good safety of capital, but can never provide an above-average return.
Stalwarts are company are well-grown established company.
Companies in this category do not grow fast, but give a return above or near the market average.
But these companies give good protection in times of recession, as the earning are more predictable.
These types of companies usually have a good dividend yield & they often buy back their shares as they may not have more room for growth.
3. Fast Growers
Fast Growers are the stocks that not only provide an above-average return, but they make one’s investment career successful.
This stock grows at 20-25% p.a., but it should not be the hot stock in the market which grows at 50% which probably cannot be sustainable.
The growth of these types of a company should be sustainable over a period of time.
The company should have a good balance sheet & profits. Check whether there is further room for growth.
Proven track record of revenue, profit, cash flows, etc. over a period of time. The most important thing to check whether the growth rate is rising or falling.
Cyclical is a company that follows the economy.
These companies grow when the economy is booming and fall when the economy goes into a recession.
Timing is everything in this stock, buying it at the right time in the cycle is very important. Look for inventory levels in the industry and all other factors.
Industries include the car industry, real estate, airlines, hospitality.
Turnaround is companies that went bankrupt and now are bought by new companies or taken over by new management with the backing of the creditors.
Examine how the turnaround will actually happen.
What are the future plans of the company for eg:- Bank of America is a turnaround which gave 10 baggers return from the last financial crisis before the COVID-19 crash.
6. Asset Play
Asset plays are the companies that are sitting in some things valuable that the market doesn’t know about.
It can be cash, assets, inventories, accounting losses, no. of users, real estate, etc.
List to keep in mind before investing asset plays:-
- Know what the asset is.
- Have patience.
- Check for the debt level.
- Look for management that is destroying or creating value.
- Look for hidden assets.
Do read my other blog: Learning of the stock market.