One up on wall Street by Peter Lynch is a seminal book written by the celebrity mutual fund manager of Fidelity for over 20 years. He summarised his finding for general public in this book. What he presents look very simple .Thats the beauty of simplicity.
true learning is when you can teach the concept to a kid of 5 years.
you have to Look around to find great stocks
Slow growers – dividend plays,earning not growing fast.They are kind of fixed return plays as if you are investing in banks fixed deposits.
Stalwarts -faster than slow growers and frontline companies of the stock market.big companies.
Fast growers- small aggressive new enterprises that grow at 20-25%
Cyclicals – These companies are in cyclical industries like steel, sugar, commodities,
Asset plays-These companies are pure asset plays
Turnarounds -as the name suggests these companies have gone through bad times and slowly they are turning to life.
Characteristics of a perfect stock
The company will sound dull
It does something dull
does something disagreeable ,disgusting
It is a spinoff
The instutions don’t own it and the analysts don’t follow it
The rumours abound,it involved with toxic waste /mafia
There is something depressing about it
It’s in a no growth industry
company has got a niche
People have to keep buying it
It’s a user of technology
The insiders are buying
The company is buying back shares
Stocks to avoid
Hottest stock in hottest industry
The next something
Avoid diversification play
Beware of stocks dependent on few customers for sells
Stocks with exciting name
What moves the stock
Earnings, earnings, earnings – stock price ultimately catches up with the earnings of the business.
you look for for lower PE ratio ,comparative to the historical .don’t look in isolation ,have a look at PE of market too. Five ways a company can increase earnings- reduce costs, raise prices,expand into new markets, sell more of its products in the old market,close losing operation or turnaround it.
If you think the stock will achieve the growth you are assuming. You make a two minute presentation on why/how the stock will achieve the growth you have assumed.
Research the facts
What percentage of sales a particular good selling product of a company commands
The p/e ratio of any company that’s fairly priced will equal its growth rate of earnings.if pe is less than growth rate ,it’s attractive.viceversa avoid the stock as it’s likely to head down.
Another way to decide if stock is right choice or not is
Growth rate of earning+dividend/pe
Less than 1, not good ,1.5 is ok ,but we should be looking for 2 and above.
Cash position- cash position is important in deciding,if the company is generating free cash flows
Debt position,- it should be favorable.
Dividends – growing dividend pay outs
Book value -if buying for book value ,it’s mandatory to have clear understanding of what constitutes those values built up in book value.
Hidden assets- book value can understate the assets too.
Good free cash flow- where you to spend less cash to generate cash.
Inventory build up – inventory build up is not a good sign
On the brighter side, if the company is depressed and inventories are coming down,it’s first sign of turnaround
Growth companies – having pe in higher numbers are still better than low growers with low pe.
Profitability- high profit margin in long term stock and relatively low profit margin in turnaround stories.
End of the year is generally a good time to buy
When to sell
When to sell is also important in return on investing.we give you some suggestions to plan selling. you plan sell as per the type of companies you are dealing with.
Slow growers -30′-50 percent appreciation
Lost market share for 2 consecutive years
Diversification in unrelated business
Balance sheet debt heavy
Pe strays too far beyond the normal range,can be bought back when the pe falls back in the range
New products have mixed results
No buying by insiders in last year
Major division is having vulnerability to an economic slump
Growth rate slowing down
Inventories are building up
Falling commodity prices
Final demand for the product is slowing down,
New capacities are being added
All the characteristivs of stocks to avoid.
Sales are down in last quarter
Key executives are leaving
P/e is excessive compared to growth.
Once turnaround has been successful
Inventory rising at twice the rate of sales growth
Pe looks inflated
Leading customer is in slowdown.
Less realisation in sales than expected
Rising of institutional share holding to double.