One upon Wall Street by Peter Lynch Summary
Types of companies
SLOW GROWERS
• Since you buy these for dividends, check to see if dividends have always been paid and whether they are routinely raised.
• When possible, find out what percentage of the earnings are being paid out as dividends. If it’s a low percentage, then the company has a cushion in hard times. It can earn less money and still retain the dividend. If it’s a high %, then the dividend is riskier.
STALWARTS
• These are big companies that aren’t likely to go out of business. The key issue is price and the P/E ratio will tell you whether you are paying too much.
• Check for possible di–worseifications that may reduce future earnings.
• Check the companies long-term growth rate and whether it has kept the same momentum in recent years.
• If you plan to hold the stock forever, see how the company has fazed during previous recessions and market drops.
FAST GROWERS
• Investigate whether the product that’s supposed to enrich the company is a major part of the company’s business.
• What the growth rate in earnings has been in recent years (20-25% is great)
• That the company has duplicated its successes in more than one city/town, to prove that expansion will work.
• That the company has room to grow.
• Whether the stock is selling at a P/E ratio at or near the growth rate.
• Whether the expansion is speeding up (3 new motels last year and 5 this) or slowing down.
• That few institutions own the stock and only a handful of analysts ever heard of it. With fast growers on the rise, this is a big plus.
CYCLICAL
• Keep a close watch on inventories, and the supply demand relationship. Watch for new entrants into the market, which is usually a dangerous development.
• Anticipate a shrinking P/E multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are achieved.
• If you know your cyclical, you have an advantage in figuring out the cycles. Its easier to predict an upturn in a cyclical industry than it is to predict a downturn.
TURNAROUNDS
• Most important, can the company survive a raid by its creditors ? How much cash and debt does it have ? What is the debt structure, and how long can it operate in the red while working out its problems without going bankrupt ?
• If it’s bankrupt already, what’s left for the shareholders ?
• How is the company supposed to be turning around ? Has it rid itself of unprofitable divisions ? This can make a big difference in earnings.
• Is business coming back ?
• Are costs being cut ? If so, what will the effect be.
ASSET-PLAYS
• What’s the value of the assets ? Are there any hidden assets ?
• How much debt is there to detract from these assets (Creditors are first in line)
• Is the company taking on new debt, making the assets less valuable ?
• Is there a raider in the wings to help shareholders reap the beneficiaries of the assets ?
• Understand the nature of the company you hold and the specific reason for holding the stock.
• By putting your stock in categories, you’ll have a better idea of what to expect from them.
• Big companies have small moves, small companies have big moves.
• Consider the size of the company, if you expect it to profit from a specific product.
• Look for small companies that are already profitable and have proven that their concept can be replicated.
• Be suspicious of companies with growth rate of 50 to 100% a year.
• Avoid hot stocks in hot industries.
• Distrust diversification, which usually turn out to be diworseifications.
• Long shots almost never pay off.
• It’s better to miss the first move in a stock and wait to see if a company’s plan are working out.
• People get incredibly valuable fundamental information from their jobs that may not reach the professionals for months or even years.
• Separate all stock tips from the tipper, even if the tipper is very smart, very rich and his or her last tip went up.
• Some stock tips, esp from an expert in the field, may turn out to be valuable
• Invest in simple companies that appear dull, mundane, out of favour and haven’t caught the fancies of Wall Street.
• Moderately fast growers (20-25%) in non growth industries are ideal investments.
• Look for companies with niches.
• When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt.
• Companies that have no debt can’t go bankrupt.
• Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the CEO’s resume or speaking ability.
• A lot of money can be made when a troubled company is turning around.
• Carefully consider the P/E ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.
• Find a storyline to follow as a way of monitoring a company’s progress.
• Look for companies that consistently buy back their own shares.
• Study the dividend record of a company over the years and also how its earnings have fared in past recessions.
• Look for companies with little or no institutional ownership.
• All else being equal, favour companies in which management has a significant personal investment over companies run by people who benefit only from their salaries.
• Insider buying is a positive sign, esp when several individuals are buying at once.
• Devote at least an hour a week on investment research. Adding up your dividends and figuring out your gains and losses doesn’t count.
• Be patient. Watched stock never boils.
• Buying stocks on stated book value alone is dangerous and illusory. It’s real value that counts
• When in doubt, tune in later.
• Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.
• Is the P/E ratio high or low in general as compared to the other companies in the same industry.
• Lower the % of Institutional Ownership, the better.
• If insiders are buying and if company is buying back its own shares, both are positive.
• The earnings growth to date should be consistent, not sporadic (exception for asset play where earnings growth is not important).
• Company should have a strong balance sheet (debt to equity ratio) – how is it rated for financial strength.
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