He managed a fund called Magellan at US Investment Giant Fidelity Investments and during his 13 yr tenure, he delivered an average CAGR of 29.2%.
It's the weekend!
Grab a cup of coffee, in this thread I will explain
1. Peter Lynch's Six Categories of Stocks
2. How to identify the type of stock you own?
3. How to think and decide about the runway for growth of a company?
Lets dive right in.
He managed a fund called Magellan at US Investment Giant Fidelity Investments and during his 13 yr tenure, he delivered an average CAGR of 29.2%.
That's how good Lynch was!
Almost 32 years later, the teachings of the book remain relevant.
(Highly recommended read)
"I've Got It, I've Got It - What is It?"
talks about the need to classify stocks.
Peter's argument is that you need to know what kind of stock you hold in your portfolio.
Not all stocks are the same - and he is right!
Very important to know what kind of a stock you own!
These are large and aging companies that barely manage to grow slightly faster than the average GDP growth of an economy.
Slow Growers pay a generous and hefty dividend but their sales and earnings aren't going anywhere
These stocks are equivalent to Snails
They were once fast growers in their industry but ultimately consolidated a large market share.
Because their industry doesn't grow by very much, these companies do not grow and as such their stock doesn't move by a lot.
1⃣ It has negligible Sales Growth
2⃣ It pays a hefty percentage of its profits as Dividends
3⃣ It controls a large percentage of its market share in the Industry it operates in.
These are large companies that are growing slightly faster than GDP of an economy.
These stocks are equivalent to Turtles.
They can swim faster than a snail can crawl.
1⃣ Large Market Share of their Products
2⃣ Steady Earnings and Sales Growth
3⃣ Earnings aren't cyclical and do not suffer under tough times
139% Return over ~6 Years
A CAGR of around 13.26%, slightly higher than Indian economy.
If you observe the chart of Nestle during Covid crisis, you will observe the stock had drawdown of about ~20% compared to almost ~40% in Nifty.
So if you own a Nestle in your portfolio with the expectation that it will give you consistent 25% annual returns then you do not know what you own.
These are companies that are growing their earnings and sales by more than 25% per year
This is where you will find multibaggers of tomorrow
Stocks in this category are like tigers and cheetahs of the investment world, they move fast and conquer territories
1⃣ Aggressively Gaining Market Share in the Industry
2⃣ Sales and Earnings Growth of more than 25%
3⃣ High Investments into their Own Business to increase product lines
Some Quarters Earnings may not grow at all while in others they will double.
The only condition is that the company should be gaining market share faster than the dull and boring industry is able to grow.
It is reinvesting back into its business and getting into newer products - Formulations, Synthesis, CDMO, BioTech.
If you had to find this early, you just had to look at its CAPEX to know its a fast grower.
2015 witnessed a decrease, then a double by 2017, then a decrease again till 2019 and then a 4x increase.
These stocks do not move steadily like Stalwarts & are not suited for retirement portfolios.
Cyclicals are companies whose sales & profits rise & fall regularly with market cycles.
These are your autos, cement, steel and metal companies.
I nominate lemurs as the animal to denote Cyclicals.
(Lemurs hibernate for upto 7 months in a year)
1⃣ Cyclicality in Sales and Earnings
2⃣ Established Market Share
3⃣ Negligible Reinvestments into their Own Business during down cycles
Enter during the peak and you can lose upto 80% of your capital or more without seeing any return for many years.
By definition, cyclicals are not consistent compounders and all investments should have a exit strategy well thought of before entry.
Here is a chart for SAIL, the cyclicality in stock is clearly visible.
This is when a cyclical is gaining market share in the industry and able to keep its Balance Sheet intact.
Shree Cement for example has given 100x returns in last 12 or so years, but that return came at occasional 30% or more drawdowns.
These are companies that have went through bankruptcy and once were a gruesome business. They are transforming themselves into a better business that is finally paying off results.
Kinda like caterpillar to butterfly transformation.
1⃣ Once a Depressed Bankrupt Business
2⃣ Transforming itself from old bankrupt business
3⃣ Financials stabilizing and sales and earnings increasing
This was a business that was neglected by its owners and made its way to bankruptcy until it was rescued by an employee and now is a growing export oriented business finding legs to become a fast grower.
These are companies that own some asset that is valued higher than the total market cap of the company.
Essentially you can buy the entire company, strip its assets into piecemeals, sell them and earn more than what you paid to buy the company.
1⃣ Market Cap Less than Sum of its Assets
2⃣ No growth in Sales and Earnings
3⃣ Main Business is stagnant
This is pretty evident from its sales and earnings growth metrics.
US Economy GDP is about $18 Trillion.
A 10x increase for Amazon means it will be bigger than US Economy, there is a very negligible chance of this happening.
Expecting a 10x return on $AMZN from here is foolish.
If they end up breaking the business, the shareholders are in for huge rewards over time.
The breakup of Standard Oil made John D Rockefeller, the richest man in America.
But that's a story for another thread.
I hope this helped you understand the various types of stocks available in market beyond just the usual tags of growth and value.
@itsTarH
I write a new thread every weekend.
All my previous work, can be found here.
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More from Tar ⚡
Wanted to invest in US Stocks?
Next couple of months are good for bottom fishing
High growth stocks with sky high valuations will finally come down to Earth🌎
My shopping list includes the below
Planet Labs
Rocket Lab
Upstart
Coupang
QS
Roblox
Ginkgo Bioworks
High Risk 🅾️
Two frequent questions
1. What website to use for data?
https://t.co/8A7w6qX4VQ
2. How do
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Next couple of months are good for bottom fishing
High growth stocks with sky high valuations will finally come down to Earth🌎
My shopping list includes the below
Planet Labs
Rocket Lab
Upstart
Coupang
QS
Roblox
Ginkgo Bioworks
High Risk 🅾️
Two frequent questions
1. What website to use for data?
https://t.co/8A7w6qX4VQ
2. How do
Ans'ing other Qs, don't know all the companies, there are too many to track & I stick with what I know
Don't feel FOMO, entire year high growth names will correct
Hunt for picks within recent SPACs, most are duds, but higher chances you find a
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Read and retweet. One of thr best investors in India who has made multibaggers from various sectors such as seeds, Financials, Auto Ancs, Real estate, Chemicals, Pharma,Technical textiles, Animal health etc. Uniquest and most realistic+diverse approach in my view @SamitVartak
Compelled to take down notes from this very interesting talk by @SamitVartak and share with the Investing community. Was introduced to this gentleman by @ishmohit1 - Thanks !!https://t.co/bCfjfNBWO1
— Mouzam (@mmali09) July 18, 2021
Highly recommended to watch it.
\u267b\ufe0fRetweet to if you find my notes useful https://t.co/3zZ9qCf90z pic.twitter.com/LGjoJDaJsT