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Peter Lynch | P/E Growth Guru
From 1977 through his retirement in 1990, Peter Lynch steered the Fidelity Magellan Fund to a total return of 2,510%, or five times
the approximate 500% return of the Standard & Poor's 500 index. In his 1989 book One Up on Wall Street, Lynch described a variety of
strategies that individual investors can use to duplicate his success. These strategies divide attractive stocks into different categories,
each characterized by different criteria. Among those most easy to identify using quantitative research are fast growers, slow growers and
stalwarts, with special criteria applied to cyclical and financial stocks. (The latter, for example, should have strong equity-to-assets
ratios as a measure of financial solvency.)
Peter Lynch's Company Categories:
Fast Growers
These companies have little debt, are growing earnings at 20% to 50% a year, and have a stock price-to-earnings ratio
below the company's earnings growth rate. Investing in these types of stocks makes sense for investors who want to find solidly financed,
fast-growing companies at reasonable prices.
Slow Growers
Here Lynch is looking for companies with high dividend payouts, since dividends are the main reason for investing
in slow-growth companies. Among other things, he also requires that such companies have sales in excess of $1 billion, sales that
generally are growing faster than inventories, a low yield-adjusted price/earnings-to-growth ratio, and a reasonable debt-to-equity
ratio. Investing in these types of stocks makes sense for income-oriented investors.
Stalwarts
Stalwarts have only moderate earnings growth but hold the potential for 30%-to-50% stock price gains over a two-year
period if they can be purchased at attractive prices. Characteristics include positive earnings; a debt to equity ratio of .33 or
less; sales rates that generally are increasing in line with, or ahead of, inventories; and a low yield-adjusted price/earnings-to-growth
ratio. Investing in these types of stocks makes sense for investors who aren't willing to pay up for high-growth companies but still want
the chance to enjoy significant capital gains.
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