Can you use your own shopping experiences to find winning
Yes -- but be careful.
In his classic book One Up on Wall Street, Peter Lynch --
perhaps the greatest mutual fund manager of all-time -- offered a
tip that he said could give individual investors an advantage over
the big guys: Invest in what you know.
Lynch thought that if you knew something positive about a stock
-- you buy the company's products, like its marketing, work in its
industry -- you could find strong stocks before professionals
caught on to them. In his book, he somewhat famously said that one
of the things that led him to one of his most successful
investments -- undergarment manufacturer Hanes -- was his wife's
affinity for the company's new pantyhose.
But while focusing on "what you know" can be a helpful starting
point, it's far from the be-all and end-all of investing. In fact,
in the revised version of One Up on Wall Street, Lynch said many
had misinterpreted his advice.
"Peter Lynch doesn't advise you to buy stock in your favorite
store just because you like shopping in the store," he wrote, "nor
should you buy stock in a manufacturer because it makes your
favorite product or a restaurant because you like the food." These
are merely good starting points, he said.
His bottom line: "Never invest in any company before you've done
the homework on the company's earnings prospects, financial
condition, competitive position, plans for expansion, and so
I couldn't agree more. With that in mind, I thought it would be
interesting to highlight some firms with popular products or
services that are also fundamentally and financially sound. Each of
these gets approval from one of my Guru Strategies -- investment
models based on the approaches of history's best investors
The Gap Inc. (
The clothing retailer isn't the hot stock it once was, but its
apparel remains quite popular. Gap has grown earnings at a 14.5%
clip over the long term (I use an average of the three-, four-, and
five-year growth rates to determine a long-term rate), part of why
my Lynch-based model is high on the $18-billion-market-cap
retailer. Its moderate growth rate and high ($16 billion) annual
sales make it a steady "stalwart" according to the Lynch approach.
To find stocks selling on the cheap, Lynch famously used the
P/E-to-Growth ratio, adjusting the "growth" portion of the equation
to include yield for stalwarts, since they often pay solid
dividends; yield-adjusted P/E/Gs below 1.0 are signs of value. When
we divide Gap's 16 P/E by the sum of its growth rate and yield
(2.1%), we get a yield-adjusted P/E/G of 0.96 -- a good sign.
Apple, Inc. (
While its shares are no longer skyrocketing as they were a few
years back, the popularity of iPads, iPhones, and all sorts of Mac
computers is undeniable. And while growth has slowed (how could it
not), my Lynch-inspired model thinks the stock is still a buy. It
likes Apple's 15.6 price/earnings ratio and 42% long-term growth
rate , which make for a 0.38 P/E/G ratio. (Growth could be
significantly slower going forward and it would be a good buy at
this price.) Another reason the model likes Apple: the company's
very reasonable 14% debt/equity ratio.
Monster Beverage Corporation (
This California-based firm makes energy drinks and alternative
beverages under such names as Monster Energy, Java Monster,
X-Presso Monster, M-3, Worx Energy and Hansen's natural sodas and
juices. It gets a 100% score from my Warren Buffett-based model,
thanks in part to its having upped EPS in all but one year of the
past decade. The model also likes that it's averaged a 34% return
on equity over the past decade, and has no long-term debt.
Signet Jewelers (
Ads from this Bermuda-based parent of the Kay and Jared jewelry
chains seem to be everywhere these days as the firm continues to
post strong growth. With a long-term growth rate of 25.3% and a
23.8 P/E, Signet has a 0.94 PEG ratio, a big reason why the Lynch
approach likes it. In addition, Signet has a debt/equity ratio
under 1%, showing the kind of conservative financing this model
likes to see.
Buffalo Wild Wings (
Founded in 1982, this Minnesota-based restaurant/bar chain seems to
be surging in popularity. It has over 1,000 locations across all 50
states in the United States, as well as in Canada and Mexico. It's
been expanding rapidly and has plans for even more growth.
The stock gets strong interest from my Martin Zweig-based
strategy, thanks in part to its strong, accelerating growth. EPS
grew 71% last quarter, up from an average of 41% in the previous
three quarters, which was up from 22% long term. The Zweig model
also likes that sales growth -- not one-time factors -- has driven
earnings growth over the long term (25% long term sales growth
rate, using an average of the 3-, 4- and 5-year sales growth
rates). And it likes that the firm's debt/equity ratio of just 7%
is far below the restaurant industry average of 158%.
Disclosure: I'm long BWLD, SIG, and MNST.