Stock Market Correction: What will Peter Lynch buy today?

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So far stock market correction (barring largecaps) has been spectacular. If we leave out the big event corrections like 2007 crash (led by proper financial industry collapse), this is indeed a historic correction for non-event periods. However, if you are in quality stocks, stay there and wait out this storm. If possible, add more on dips. Definitely dump garbage stocks. In our own stock watch-list (used for paid recommendation), new stocks are getting added every week as small & mid cap continues to tumble and becoming more attractive. Equity as an investment is best played over long term. Timing the market is futile as Mr. Market is full of surprises. Now-a-days general feeling is that stock market will not perform until 2019 elections but who knows what Mr. Market has got under his sleeves.

Coming back to the article series, today we have another legendary investor Peter Lynch on AI post. We had published similar posts on Warren Buffet (click) & Benjamin Graham (click) as correction is one of the best time to buy stocks. True to our philosophy, we are keeping the language simple and contents precise. Hope you enjoy it.

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About Peter Lynch

Peter Lynch

Peter Lynch is someone most fund managers will aspire to be. He was a maverick fund manager who shot to fame with his mutual fund “Magellan” from Fidelity in 1980s.

Peter was born in 1944 in Massachusetts in a modest family. At the age of 7, he lost his father to cancer. His mother took jobs to bring up the kids. He studied at Boston College and bought his first stock Flying Tiger Airlines at $8 which quickly became $80. (Readers: Don’t get excited about SpiceJet 😉 ). Peter had tasted success in stocks. Eager to join some big firm to hone his skills, he worked as a Caddie (person who carries golf equipment) at a Golf Club frequently visited by investment managers. Soon, he was picked up by George Sullivan (Fidelity’s then president) to join Fidelity as an intern. Soon he grew up to work as permanent analyst and later headed the research team at Fidelity. In 1977, he was named as fund manager for a boring and non-performing Magellan Mutual Fund. He totally turned it around. Between 1977 till 1990, when he retired, fund gave 29% CAGR which is exceptional for a mutual fund. At one time, every 1 in 100 american had invested into Magellan Fund. Fund AUM (asset under management) grew from $20 million to $14 billion. You will be surprised to know that at peak, Magellan had 1000 stocks in portfolio.

After his retirement, he remains as a board member for Fidelity but his activities are more focused on philanthropy. He still enjoys reading balance sheets and prefers them any day over Golf. He believes that common man on the street can notice multibaggers way ahead of the professionals. In one of the interviews, he openly accepted that he also missed noticing Apple when his daughter bought a Macbook, Netflix while he himself purchased subscription, missed Starbucks where he went regularly. He coined the term “tenbagger” which was inspired by Baseball. In baseball, when a player hits a home run, he can potentially get ten bags for his team (Similar to hitting a six in cricket). He authored three books, “One Up on Wall Street”, “Beating the Street” & “Learn to Earn”.  Of them, we really like “Beating the Street” as it is more focused on application of his investment principles.

Investment Philosophy

Peter Lynch has written about his investment philosophy in various books and magazines. He is one of most widely covered investment guru. He strongly believes that small investor has an edge over big investors as he can buy thinly traded stocks which institutions can’t buy. According to him his main investment tools are not some sophisticated software but his own eyes & ears. He popularized the concept of GARP (Growth at A Reasonable Price). GARP is a marriage between Value Investing and Growth Investing. Post Magellan Fund’s popularity, many fund managers deploy this technique. In India also you will easily find many funds following GARP technique, some of them are quite popular as well. For example, Franklin India Focused Equity Fund (Erstwhile Franklin India High Growth Companies). There are four major cornerstones of his investment philosophy which are as follows:

  • Buy What You Understand: He puts emphasis on using your local market knowledge to your advantage. If a company has to be do well in an economy, then people of the economy must be touched or impacted in someway or the other. An investor must keep his mind open whenever he visits a mall or marketplace and observe fast catching trends or brands. If you are working in a industry, you will be among the first one to notice new trends or troubles within the industry before an analyst gets a whiff of it. If you buy stocks whose business you can understand or you yourself are a consumer, it makes easy to track & analyse such stocks.
  • Always Do Your Homework: Once you have identified a stock using your “local knowledge”, don’t just buy the stock. The job is just half done. You need to complement your local knowledge with rigorous analysis on company’s financial performance. Doing financial analysis can get very deep but you must keep your eyes on below parameters:
    • PEG Ratio: The ratio of earnings to growth per share. PEG was popularized by Peter Lynch. You should not look at earnings ratios in isolation but see it in conjunction with growth potential. He favors a high P/E ratio stock but with even higher growth rate over business with lower earnings multiple (P/E) and lower growth rates. A high growth company will continue to keep earnings multiples under control and thereby sustaining continuous rise in stocks prices. He favors stocks with PEG ratio less than 1.
    • Sales Breakup: If you like a product using your local knowledge, always check how much this product is adding to the overall sales for the company. A mere 5% contribution will not make a difference in company’s fortune. For example Mahindra & Mahindra (M&M) is the first & only company in India that sells pure electric cars, others are yet to catch-up. Unfortunately, sales contribution from electric car remains minuscule for M&M. So betting in M&M just because of electric cars will be a mistake.
    • Asset & Capital Utilization Skills: Assuming a company has got a great product, the management has to be smart enough to efficiently use the available assets & capital for continuous growth funded by free cash flow from sales & operations. There are many cases where despite having a leading product, company keeps running into losses. An example of such a business in modern times will be Ola or UBER as they continue to bleed money despite having disrupted ridership patterns across the world.
  • Forget Market Timing: Lynch believed that timing the market is futile over long term. He published an analysis where he showed that for 30 years period, a best & worst market timing will result in only 1.7% extra returns. He also advocated to ignore interest rates cycles and cut market noise. Only focus on stock selection process and stick to it, rest everything will automatically fall in place.
  • Invest for Long Run: Mr Lynch believed that good stocks are fairly predictable over long run. You can always fairly predict if it is going to go higher or lower in a decade or so. Predicting the same for next year is as good as flipping a coin. So Peter lynch wants you to buy when market is down and also to buy when market is up. Focus should be on stock selection and not on market timing.

We can go on a great length to cover Lynch’s investment principles but this is a weekend article and we don’t want to make it too heavy. For folks who are really keen to know more, we recommend you to read his books “One Up on Wall Street” & “Beating the Street”, especially the latter.

Stock Watch-List

Based on Peter Lynch’s principles and our own set of filters, we arrive at below sets of stocks which pass the criteria at current valuations. Please take a note that this is not an investment advice as analysis is done purely on numbers and not on qualitative aspects.

We have selected stocks with a market capital of above ₹ 100 Cr but less than ₹ 1000 Cr which means that largecaps & midcaps are excluded from this list.

  • Avantel Ltd. (Market Cap: ₹ 111 Cr)
  • Freshtrop Fruits Ltd. (Market Cap: ₹ 114 Cr)
  • Oceanaa Bioteck Industries Ltd. (Market Cap: ₹ 117 Cr)
  • Prima Plastics Ltd. (Market Cap: ₹ 122 Cr)
  • Dynemic Products Ltd. (Market Cap: ₹ 140 Cr)
  • JHS Svendgaard Ltd. (Market Cap: ₹ 145 Cr)
  • Samkrg Pistons & Rings Ltd. (Market Cap: ₹ 213 Cr)
  • Balashore Alloys Ltd. (Market Cap: ₹ 324 Cr)
  • The Byke Hospitality Ltd. (Market Cap: ₹ 482 Cr)
  • Datamatics Global Ltd. (Market Cap: ₹ 583 Cr)
  • Jay Bharat Maruti Ltd. (Market Cap: ₹ 918 Cr)

 

In the end we leave you with this quote from Peter Lynch-

“When the market is down and you buy wisely, at some point in the future, you will be happy. You won’t get there by just reading. Now is the time to buy” –Peter Lynch.