In his excellent book
One Up on Wall Street
, Peter Lynch, the best mutual fund manager ever, revealed a
powerful charting tool that helped him to achieve a gain of 29.2%
in his portfolios for 13 years. In this chart, Peter Lynch drew
the stock price and the earnings per share together and aligned
the value of $1 in earnings per share to $15 in stock price. He
wrote in pages 164-165 of the book:
"A quick way to tell if a stock is overpriced is to compare
the price line to the earnings line. If you bought familiar
growth companies - such as Shoney's, The Limited, or Marriott -
when the stock price fell well below the earnings line, and sold
them when the stock price rose dramatically above it, the chances
are you'd do pretty well."
To see how this Peter Lynch Chart works, we applied it to the top
, the most successful investor ever: Wells Fargo (
), Coca-Cola (
), IBM (
), American Express (
) and Wal-Mart (
). The Peter Lynch Chart of Wells Fargo is below, where the green
line is the Price Line, and the blue line is the Peter Lynch
Earnings Line. When the Price Line is well below the Peter Lynch
Earnings Line, the stock is a buy.
Among these top five holdings of
, we found that Wells Fargo is the most undervalued. Wal-Mart and
IBM are about fair valued. We then compared this result with
the trading activities of Warren Buffett
. To our surprise, we found that Warren Buffett was buying Well
Fargo heavily and adding to Wal-Mart and IBM.
Is this just a coincidence? Does Warren Buffett only buy the
stocks that are undervalued as measured by the Peter Lynch Chart?
Is Warren Buffett using this powerful tool, too?
We don't know the answer to the question. But we know that great
minds think alike!
Now this powerful charting tool is available at GuruFocus.com.
You can create it in just two clicks for any of the more than
50,000 stocks covered by GuruFocus.com.
We applied this tool to the portfolios of George Soros, Carl
Icahn and other investment Gurus tracked at GuruFocus.com. We
even developed a screen for this strategy that makes it easy to
find stocks that are traded well below Peter Lynch's Earnings
Certainly buying stocks that are traded well below their Earnings
Line is not the only criterion Peter Lynch used to achieve his
29%-a-year results. We also added his other requirements such as
strong balance sheet and solid growth into the screener. When I
limit my Peter Lynch screen to only the stocks that are owned by
Warren Buffett, I found seven othereight companies that Warren
Buffett owns and Peter Lynch would be buying. All of these eight
companies have strong balance sheet, solid growth and reasonable
valuations. One of them is of course Wells Fargo. Warren Buffett
loves it so much that he made it his largest holding.
Now both Warren Buffett and Peter Lynch are working for me! I
have added these stocks to my watch list.
: If you'd like to learn more about this Peter Lynch + Warren
Buffett screener, the Peter Lynch Chart and other powerful
valuation tools on GuruFocus.com, your GuruFocus Premium
Membership allows you to do so. If you are not a Premium Member,
visit this link
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