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.
https://t.co/az1Rsw05TO
All my Threads so far \U0001f9f5 \U0001f447\U0001f3fc
— Tar \u26a1 (@itsTarH) June 5, 2021
The kind folks at Skillshare have increased the free trial length to 30 days if you sign up using this link
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Releasing new classes on Personal Finance & Investment Research coming weekend
The next is a series of articles on Biologics CDMO industry.
Subscribe for free, if you're interested.
Thank you to the 1500+ of you who already have!
https://t.co/6tHU5fQXGu
More from Tar ⚡
To see the bull case for #IEX one needs a bit of imagination on their side :)
Market always moves to the cheaper alternative, slowly at first, then all of a sudden.
Market always moves to the cheaper alternative, slowly at first, then all of a sudden.
As more and more companies look towards the ESG factors, IEX would be a potential beneficiary.
— Kharanshu Parikh (@Kharanshu) August 7, 2021
Source: Suven Pharma\u2019s Annual Report
\u2066@itsTarH\u2069 pic.twitter.com/sRdMIAMaVP
Cause everyone wanted to buy it at 300+ and no one wants to buy it at 200
Market is short sighted and loves to buy high and sell low
Sequent is a long gestation stock, it won't deliver it's real earnings until FY23-25
Not suitable investment for those who want 100% return/yr
https://t.co/7ytUeSd7gg
Market is short sighted and loves to buy high and sell low
Sequent is a long gestation stock, it won't deliver it's real earnings until FY23-25
Not suitable investment for those who want 100% return/yr
@itsTarH hey Tariq, any idea why is Sequent falling?
— Vivek (@pa_stock) September 27, 2021
https://t.co/7ytUeSd7gg
Don't expect the earnings to go anywhere till FY23.
— Tar \u26a1 (@itsTarH) August 10, 2021
Real growth will only come post FY24.
I expect the stock to either correct or stay muted till then. https://t.co/lUQfzxojTO
More from Stockslearnings
1/n
Dear @chartmojo
Out of curiosity, just gone through your timeline and prepared a data of your shared tweets in OCT'2020;
You will not believe the following numbers:
Charts shared = 29 (2 excluded due to splits)
Period = 8-oct to 30-oct'20
..
2/n
If min.10k invested on your each design, then
Amount invested in Oct'20 = 2.91 lacs
Present investment value = 4.72 lacs
Maximum drawdown = 9%
ROI = 62% in 200 days
Annualized ROI = 147%
**You ROCK brother**
...
I've prepared a sheet for all your Oct'20 tweets; It was so much learning on the charts as well as on the data-part; Please keep on the good work.
Sheet link:
https://t.co/8BJtMsOkBD
With regards,
Deepak
Dear @chartmojo
Out of curiosity, just gone through your timeline and prepared a data of your shared tweets in OCT'2020;
You will not believe the following numbers:
Charts shared = 29 (2 excluded due to splits)
Period = 8-oct to 30-oct'20
..
2/n
If min.10k invested on your each design, then
Amount invested in Oct'20 = 2.91 lacs
Present investment value = 4.72 lacs
Maximum drawdown = 9%
ROI = 62% in 200 days
Annualized ROI = 147%
**You ROCK brother**
...
I've prepared a sheet for all your Oct'20 tweets; It was so much learning on the charts as well as on the data-part; Please keep on the good work.
Sheet link:
https://t.co/8BJtMsOkBD
With regards,
Deepak
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USC's Interactive Media & Games Division cancels all-star panel that included top-tier game developers who were invited to share their experiences with students. Why? Because there were no women on the
ElectronConf is a conf which chooses presenters based on blind auditions; the identity, gender, and race of the speaker is not known to the selection team. The results of that merit-based approach was an all-male panel. So they cancelled the conference.
Apple's head of diversity (a black woman) got in trouble for promoting a vision of diversity that is at odds with contemporary progressive dogma. (She left the company shortly after this
Also in the name of diversity, there is unabashed discrimination against men (especially white men) in tech, in both hiring policies and in other arenas. One such example is this, a developer workshop that specifically excluded men: https://t.co/N0SkH4hR35