Stocks Peter Lynch would love but would not touch... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Stocks Peter Lynch would love but would not touch... 

A  A  A
In this issue:
» Why are the Chinese obsessed with Buffett?
» Coming soon: A new bourse for tech startup IPOs
» Roundup on the markets
» ...and more!


Editor's Note: My colleague Rahul Shah is all set to reveal his "Money Multiplier" formula. And I strongly recommend that you don't miss it! After all, it isn't every day that we get to hear an astute research analyst reveal his secret formula behind his most profitable recommendations. So block your calendar for 5PM on 15th June for this mega event! And yes, if you have any questions for Rahul, just post them here!

00:00  Chart of the day
As I wrote the other day, the trick in hunting for the 10 bagger is not just in finding high growth stocks. But also knowing at what valuations to buy them and when to sell.

Now if you are looking for stocks that will make the biggest difference to your portfolio, they cannot be ordinary. They have to be companies growing at extraordinary rates and at the same time sporting excellent fundamentals. And when we think of such criteria we defer to the learnings from Peter Lynch.

Rest assured we are not going to repeat his oft repeated sermons like 'buy what you know' and 'keep your eyes and ears open'. Instead, we would assume that you are already doing so. And what we will tell you is stocks Lynch would avoid buying currently despite loving them!

'Why so?', you may ask.

Well these are stock that would fulfill almost all of Lynch's buying criteria. They are high growth stocks with little debt on their books, fantastic businesses and excellent return ratios. But their valuations would not really tempt the legendary investor.

How much is too much to pay for these stocks?

Mind you stocks which show signs of perpetual growth with excellent fundamentals are not 100% resilient to risks. In fact Lynch would tell you that here too there are some key alarm signals to watch out for. Heavy spend on marketing and sales is one of them, as such spend may not be sustainable. Relying heavily on top executives and the risk of their joining a rival firm could be a big risk to valuations. Cyclicality can deal a big blow to turnaround companies that are basking in the glow of low debt and high earnings. Similarly companies posting high growth in profits on the back of sale in assets are unlikely to be growth stocks for long.

Thus while you can love and keep a watch on companies that seem to be the best 10 baggers in the making, you would rather be patient to buy them. Only if their fundamentals seems sustainable and when valuations seem reasonable.

Would you want to pay any price to buy solid high growth stocks? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Blue Chips And Big Returns...

What in your opinion is the biggest return you could make from blue-chips?

Do low and slow returns come to your mind instantly?

Don't worry, you're not the only one who thinks that way!

But the truth is that we've picked out several high potential blue-chips over the years. And some of our recommendations have given returns such as 546% in 3 years 2 months, 771% in 6 years 6 months, 478% in 5 years 11 months, and more.

And now, YOU also could make such kind of returns from blue-chips regularly.

Want to know how? Just click here for full details...

------------------------------

02:30
That Warren Buffett is the world's greatest investor is probably inarguable. Indeed, his wisdom in the field of investing has not only helped him amass huge wealth, but has been devoured by ardent value investors the world over. The latest country which has taken active interest in Buffett is none other than China. The dragon country has emerged as a country to reckon with and one of the reasons for this has been the stupendous growth in its economy in the past few years.

The Chinese stock market has also reflected this. As the aspirations rise, Chinese investors are considerably interested in Buffett's investment nuggets to help them build wealth over the long term. Consider this. As reported in an article in Moneynews, a Chinese company that develops online games bid more than US$ 2.3 m to win a private lunch with Buffett. Interestingly, whether Buffett's principles of value investing can be applied to Chinese stocks remains to be seen. Especially since China does not win brownie points for transparency and accuracy of information.

03:40
Raising money is likely to get easier henceforth as regulators are contemplating setting up a separate bourse for companies, especially tech start ups which are hungry for capital. Under present capital raising rules, these companies have to meet stringent criteria relating to promoter lock ups and profitability. Inability to comply with these norms means they remain devoid of capital required to fund growth. And in the process seek funding from venture capitalists (VC) and private equity (PE) investors. However, that seed money is not sufficient for large scale expansion and there was a need to have some platform whereby these companies could raise money easily.

To give you an idea how big the tech start up opportunity is fathom this. As per news reports, about 3,100 start ups in India have raised US$ 7.2 bn through VC and PE funding since 2013. But very few have made debut on the bourses so far. Thus, if there is a new exchange or a platform, their requirement for growth capital can be met domestically. And they won't have to turn their heads towards foreign markets. Many capital hungry start ups which were not able to raise money in India have explored the possibility of raising money from abroad in the past. However, getting the desired valuations turned out to be a problem in foreign markets. Hence, they were a bit apprehensive to try this option.

Thus, the idea to set up a new platform/exchange is unique in a sense as it would help start ups meet their capital needs domestically at better valuations. However, having less stringent rules for listing also increases the probability of companies with poor track record/practices making it to the bourses. This is one area where prospective investors should pay attention.

04:40
Barring stock markets in China and Brazil, majority of global indices remained under pressure for the week gone by. Uncertainty over the timing of rate hikes by the US Fed and Greek's debt saga continued to weigh on the markets. All eyes are now on the US Fed meet which is scheduled next week.

Major European markets remained under pressure. Greece's bailout agreement with its creditors is set to expire soon this month. Greece has already delayed one payment and is now into negotiation for a new deal to avoid defaulting on its massive debts. On the other hand, few equity markets in Asia notched some mild gains. China was the leading gainer (up 2.8%) for the week.

Back home, Indian markets continued to remain under pressure for the third consecutive week. The BSE Sensex was the top loser in the pack. Persistent selling activity was witnessed across the indices. Most of the sectors witnessed selling pressures led by realty and consumer durables stocks for the week. Worries over economic recovery and deficient monsoon forecast have been the prime factors.

Performance during the week ended June 12, 2015
Data source: Yahoo Finance


04:50  Weekend investing mantra
"Behind every stock is a company. Find out what it's doing" - Peter Lynch
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
Recent Articles:
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

Equitymaster requests your view! Post a comment on "Stocks Peter Lynch would love but would not touch...". Click here!

2 Responses to "Stocks Peter Lynch would love but would not touch..."

vijay s

Jun 15, 2015

I won't buy until valuations are cheap and about 20% safety margin is there, this is I've learned it from your recommendation methodology.

Like 

SANKARAN VENKATARAMAN

Jun 13, 2015

If you had given PEG ratio along with PE ratio, and Intrinsic value it would have given better insight whether the high valuations are sustainable.

Like (1)
  
Equitymaster requests your view! Post a comment on "Stocks Peter Lynch would love but would not touch...". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407