ValuePickr Forum

Peter Lynch: Art side of stockpicking

Over the last 5 years of my investing experience I have learnt it is much easier to have a command over the what I call, the science side of stockpicking - basically understanding the numbers, ratios and their correlation, interpreting data for trends. Atleast you can slog slog till you start getting a hang of it, and your passion can take you there! You can definitely shorten your learning curve, by continuously reading up and culling from the experience of the Gurus, and senior investors.

But the Art side of stockpicking - knowing what will do well and why - its almost a refined art. This gut feel comes more from your direct experience in the markets, your observation of patterns and trends. Its very difficult to shorten your learning curve here - I thought.

I am delighted by what Hitesh had to say about the effect the Peter Lynch book had on him, and how he has read it 10 times plus. We reproduce that here, in a separate thread, as I thought all of us could benefit by some focused discussion - on the art side of stockpicking.

One Up On Wall Street by Peter Lynch – I consider this one to be the Bhagwadgita of investment for lay investors who do not have too much background in analysing stocks in detail. What I have found fascinating in this book is that most of the situations and examples which Lynch puts forward in the book almost always play out in the markets. I can find a lot of parallels in the examples put in the book and opportunities put up in the book.

I think it is one of the best books in developing the art part of stockpicking. I find it very interesting and have read it almost 10-12 times and would like to read it again and again.

Hitesh - we would love you to bring out the Art of your stockopicking - by taking some examples from the Lynch book and what parallels you drew in our markets. I am always fascinated by how with very little fuss, you are able to zero in on the winners and you are one of the earliest to spot them - remember Manjushree Technopack and Mayur Uniquoters examples. Why Jubilant Foodworks was a sitting duck, etc.

While Hitesh will kick-off this discussion, let us all try to bring out our own examples. if we know of any other books that have this quality lets discuss that here with specifics. That will be a great education for me! and for many beginner and maturing investors I am sure!

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Hi donald,

regarding the Lynch Book and some parallels in the Indian Markets.

1). Mayur Uniquoters-- This stock came to my notice while looking at the announcements of SAST-- wherein promoters have to disclose their buying/selling in their own company.

Stock price had posted a high of around 137 and then was cooling off around 100-105 in dec 09.

even after the sharp run up in stock price from 20 levels to 100 the promoter Manav Poddar had picked up around 16000 shares from the market at around Rs 100 per share. And when I looked more into it I found that promoter holding already was more than 72%. Now this had me thinking about why the promoter was buying even though the holding was so high. And I was interested in the stock.

Looking at the financials revealed the improving financials.

Some Lynch maxims which applied to this company were:

1). High promoter holding

2). Promoters buying from open markets.(mind you this always does not hold good in isolation)

3). Name of the company-- Lynch harps a lot on the name of company being unusual-- who would have guessed the Mayur Uniquoters would be producing synthetic leather.

4). Low debt inspite of repeated expansions.

5). No research reports/no institutional or fund holding in the company.

All the above were pointers which Lynch elucidates in his book for searching multibaggers. In place of the 5 minute drill he tells, I prepared a short synopsis and put it up on TED to get some feedback from fellow boarders.

MANJUSHREE TECHNOPAK–

This was moving around 30-33 when it came to my notice. I think the stock was available at a PE of around 4 based on the expected full year earnings.

The earnings were consistently going up and still the stock price was not moving up. At that time there were some objections raised on TED about ROE being very poor etc.

Here again there were no research/analyst reports on the company and fund/institution holding was practically negligible.

PAREKH ALUMINEX

I had read an equitymaster research report on this stock where they recommended the stock at around 177 in Jan 08. I was impressed with the business of the company and one thing that struck me immediately was that “This is a business which any idiot can run”

After the market crash I kept following the stock fundamentals and its price. It went down all the way to levels of around 40 and was available at a PE of around 2. There was a lot of debt taken for expansion, but the results kept on chugging along steadily with earnings improving all the time.

The company had made private placement at an opportune price of around 232 and 262 to various funds in Nov 07 and Jan 08.

What clinched the issue for me was the promoter buying from the market at a level of around 80 and then again at around 50 when stock price further fell. And the funny thing was that the last instalment of promoter buying at around Rs 50 was done when some troubled FII sold their holding which they had acquired in the QIP at a level of around 232 just a few quarters back. And I was impressed with the promoter buying at Rs 50 fearlessly when the whole market was in doldrums.

The stock went up to the levels of 500-600 before some market rumours of price manipulations surfaced and it was shot down to around 200 levels.

The business still remains great but promoters are again contemplating QIP and raising funds for further expansion but having learnt about the evils of frequent equity dilution and increasing debt, I would stay away. Ideal way for the company was to fund the expansions from internal accruals in a phased manner.

JUBILANT FOODWORKS

The stock after the initial euphoria post listing went up to around 400-425 levels in April 10 before crashing down to 250-280 levels in a few months. Here I had firsthand knowledge about the products of the company finding a lot of acceptance in younger people who preferred to order takeaway pizza or ordering from home. The business was bound to grow with increasing number of stores.

Where I goofed up was in following the PE ratio and finding the stock expensive. Here again the Lynch adage came true about stocks running up 2-3 times after having run up sharply.

INDAG RUBBER

This again is a stock with very low visibility among investors. It has come out with fantastic results for the Half year ended Sep 2011 having posted EPS of around 17 plus and in all likelihood will post EPS of around 35 for whole year fy 12. Now at cmp of around 140 the stock is available at a PE of only 4.

Some Lynch attributes in this stock again are:

1). Very high promoter holding of around 77-78%

2). Extremely cheap valuations largely ignored by the markets.

3). Looking at the higher sales figures, the fruits of expansions are now visible.

4). Inspite of expansions the balance sheet of the company remains absolutely clean with very low levels of debt.

It has ROE in excess of 30.

Here again I think a lot of potential buyers are suffering from price fixation having seen the stock price hover around the 80-115-120 levels for very long period of time. Post the q2 results this had shot up to around 160 levels and in line with market correction is consolidating without really giving up too much around the 135-145 levels. I think this is a great stock to own.

I will keep on posting some more anecdotes correlating Lynch wisdom applicable to stock picks.

regards

hitesh.

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I havent gone through this book but based on Hitesh’s comments above, the stock which immediately comes to mind is Haldyn Glass and Sree Rayalseema Hi Strength Hypo. Reasons for Haldyn Glass

Promoter buying from open market

Low debt

No media and institutional coverage

Reasons for SRHSHL

Promoter increasing their stake by private placement of shares at higher than market price rather than through warrant route.

Low debt realted to main business. Majority of people unable to look factor in that the major debtis related to Wind power plant which in turn is tax beneficial.

No media and institutional coverage

For the above stocks, the financials seem to be strong in my view.

I finally started on my promise of re-reads. And I prioritised the Lynch book first -why? Most active senior investors I know with steller-multibagger record, have read the book over 4-5 times, and keep referring back:)

Want to record here what stands out from the re-read (even though we may know them), so it can help me quickly re-cap the essentials of what I gained from this book. Some of the insights are unique to the Lynch perspective, and I am sure it will benefit all inspired learners like me.

[Interested readers will need to refer back to the Book (Pgs 110-127), to get the context right. These short notes are as much for retaining the essence, as for getting more folks to discern - why should I prioritise reading/re-reading the Lynch book.]

_ Text in Italics reflects the “essence” as I see it, in this re-read:)_

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The six categories of stocks

Slow growers )- Usually large and ageing companies. When an industry at large slows down, most of the companies within the industry lose momentum too. Regular and generous dividends -usually a sure sign.

If growth in earnings is what enriches a company, then what’s the sense of wasting time on sluggards.

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Stalwarts -Stalwarts are companies like HUL, RIL, ITC, Bharti, Telco. Depending on when you buy them and what price you can make a sizeable profit in stalwarts. When anyone brags about doubling or tripling his money on a stalwart, the next question ought to be " and how long did you own it"

In many instances the risk of ownership has not resulted in any advantage to the owner, who therefore took chances for nothing.

{Rings especially true for my legacy holdings in above that gave me huge gains in 2009, but in the 2 years since July/Aug 2009 didn’t have much to show for the risk I took owning them. Realising this, I reduced my holding substantially in most -the reasons why- are recorded in this Capital Allocation thread}

Lynch adds "I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times."

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**Fast growers - **These are among my favourite investments, Lynch says. Small, aggressive, new enterprises that grow at 25% plus a year. If you choose wisely this is the land of the 10-to-40 baggers, and even 200-baggers. With a small portfolio, one or two of them can make a career.

A fast growing company does not necessarily have to belong to a fast growing industry. As a matter of fact, I would rather it didn’t, in which case it is winning over market share and capturing a bigger segment of the market.

There’s plenty of risk in fast growers, especially in younger companies that tend to be overzealous and underfinanced. Also smaller fast growers risk extinction, and the larger fast growers risk a rapid devaluation when they begin to falter.

But for as long as they can keep it up, fast growers are the big winners. I look for the ones that have good balance sheets and are making substantial profits. The trick is figuring out when they will stop growing, and how much to pay for that growth.

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**Cyclicals -**A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion. In a growth industry, business just keeps expanding, but in a cyclical industry it expands and contracts, then expands and contracts again. the autos and the airlines, the tire companies and steel companies, and chemical companies are all cyclicals.

Cyclicals are the most misunderstood of all the types of stocks. It is here that the unwary stockpicker is most easily parted form his money.

Timing is everything in cyclicals, and you have to be able to detect the early signs that the business is falling off or picking up. If you work in some profession that is connected to steel, aluminum, airlines, automobiles etc then you have got your edge, and nowhere is this edge more important than in this kind of investment.

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**Turnarounds - **Turnaround candidates have been battered, depressed, and others can barely drag themselves to the bankruptcy courts. These aren’t slow growers, these are no growers. These aren’t cyclicals that rebound; these are potential fatalities.

Turnaround stocks make up lost ground very quickly.The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the state of the market.

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**Asset-Plays - **An asset play is any company that’s sitting on something valuable that you know about, but that the market has overlooked.

The asset play is where the “local” edge can be used to greatest advantage. Asset opportunities are everywhere. Sure they require a working knowledge of the company that owns the assets, but once that’s understood, all you need is patience.

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Dear Donald,

The only stock where i could successfully apply the principles suggested by Pat Dorsay and Peter Lynch is Nesco.

Great Asset play + simple business + considerable free cash flow each year due to business model + economic and business moat + 20% of market cap in the form of cash reserves + local edge since i travel the route everyday and i can see the activity + next gen coming in giving the much needed aggression + considerable scope still available for expansion. Most importantly debt free and will continue so. Worst case if the company shuts down, the value of vacant land itself is twice the present market cap.

Exactly the thoughts that went through my mind - as I was making notes on Asset Plays from the Lynch summary above! Small men think alike:)

NESCO - looks v v interesting!

Nooresh’s notes on NESCO, at his blog Technical View by Nooresh. He has also generously provided the following reports for download from his site.

NESCO writeup -Sanjay Bakshi )- Ayush tells me, this is all anyone needs to read to understand the business well.

NESCO -Motilal Oswal Report

So let’s get cracking on NESCO.

Continuing this discussion on Nesco thread under “Untested but worth a look” forum

âBeating the Streetâ by Peter Lynch is a book about âGROWTH STOCKâ **which is **worth reading. He has explained in detail about his experience in identifying the growth stock, developing the story about the company and following the same.

I had invested in Indag Rubber with lot of conviction. Good product, good balance sheet, interim divided etc. I thought that booming automobile industry will pave way to tyre & retread companies to reap benefits. But, the share price refused to move above Rs. 110/- in spite of better quarterly results. Later, I noted that all tyre companies share prices are quoting at PE range of 6 to 9. After lot of frustration, I started looking around.

Peter Lynch has mentioned that buy what you see. So, I watched âThangamayilâ for few weeks. The business model of the company was similar to one which Peter Lynch explained in âOne up on Wall streetâ. Success of business at one place and duplicating the same in other places. Further, it had a boring name from a non-industrial place called Madurai. Promoter stake was 65%. Major threat for the company was from goldsmiths of unorganized market. However, I thought that tailors were doing good business in the past. later, the life style changed to âbranded apparelsâ . Same way, this Jewellery business will change to âBrandedâ soon. Players like Thangamayil can do roaring business in Tier II & III cities soon.

Kenneth L Fisher has mentioned in his book ‘Super Stocks’ that small companies would do good business in small market and Vice versa.

Thangamayil is growing steadily in small market along with its share price.

Yes, Thangamayil looks very interesting. We should dig up more on it. The risks on my mind are - High leverage and increasing inventory.

I just finished reading the Pat Dorsey book on five principles for successful stock investing. Excellent book and i think worth a few re reads. Combined with Peter Lynch’s One Up on Wall Street, this book makes for a fantastic combination to apply practical principles to successful stock investing.

In the penultimate chapter on Industrial materials, the author stresses a lot on efficiency of operations, great balance sheet, good utilisation of capital, ROEs, free cash flows and TATO and FATO – Total Asset Turnover and Fixed Asset Turnover. Based on all these factors the one stock that immediately comes to mind is Mayur Uniquoters. It fits in with both Lynch’s and Dorsey’s principles. I think it is likely to be a big big winner from here on also.

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I just ordered the book “****The Five Rules For Successful Stock Investing”. Thanks for this pointer


On Peter Lynch principles I was able to buy HSIL. In Late 2009, In a nearby mall, a beautiful store was opened in the name of “EVOK”. I liked the store. There was good footfalls in the store. Hindware as a superbrand was also getting customer’s trust. I also liked the hard wood furniture they were selling in the store.I also noticed that middle class was spending more on bathroom fittings… now bathrooms was becoming a style statement. It was no more a dirty utilitarian place. And HSIL… the largest bathroom fitting company in India had a market cap of less than 300 crores!! With price to sales ratioof less than 0.5, price earning ratio in single digit and dividend yield of more than 3%. I was able to purchase HSIL shares at Rs. 55-60 range.Well, it had a good run in the rising stock market and went upto 240. Even in the market correction, it didnt loose much- merely 35% from peak. Not bad. Financials are also behaving appropriately. Looks like worth holding through thick n thins.

Finished reading peter Lynch’s Beating the street. As mentioned by Siva earlier, he discusses a lot about fast growth stocks. Although the book doesnt qualify in the same class as One Up it still makes interesting reading.

Of interest is his description of his years at Magellan where he discusses the early , mid and final years at Magellan. And his constant outperformance in all those years says a lot about the investment acumen of the man. His unassuming style of narration hides the true genius of the man. And to simplify his investment methods and put it up in front of small investors so that they can exactly follow his methods with a lot of success says a lot about his methods and their ease of application in unearthing multibaggers.

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Notes to One Up On Wall Street

By: Peter Lynch with John Rothchild

1). “Only invest what you could afford to lose with out that loss having any effect on your daily life in the foreseeable future.” Lynch explains that when investing in Common Stocks, one must be prepared to invest for at least a 5 year period. He indicates that companies do hit “banana peels” and that these drops can occur for long periods of time.

2). Necessary qualities of an investor in order to succeed. Of course this would include an investment advisor.

A. patience.

B. self-reliance

C. common sense

D. open-mindedness

E. tolerance for pain

F. detachment

G. persistence

H. humility

I. flexibility

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J. willingn ess to do independent research

K. an equal willingness to admit to mistakes

L. ability to ignore general panic

3). Many investments could be right under your nose. Lynch discusses a physician who is very enthused about a certain product he has been writing prescriptions for. He stresses that if you love a company or a product, you should not run out an d buy the investment, but you should run out and start learning about the company, as it may become a potential investment. He calls this "taking

advantage of what you already know."

4). Some items to remember:

A. look for companies that are off the radar scope. These could become the future 10 baggers.

B. invest in companies, not the stock market.

C. igno re short term fluctuations

D. Invest in a house before you invest in the stock market. I am writing this on February 1, 2005, I don’t necessarily agree with this principle at the moment, as I believe we may be in a massive housing bubble. Yet, my profession is investing in companies, not in houses, hence I am not qualified to give housing advise, and at the same time, over 1/ 2 of my net worth is tied up in my house. (Ronâs note on 6/21/11 looks like I was correct on the housing bubble.)

E. Large profits can be made in common stocks.

F. Large losse s can be made in common stocks.

G. Predicting the economy is futile.

H. The average person is exposed to interesting local companies and products years before the professionals.

5). Investing without research is like playing poker and never looking at the cards.

6). “If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst would admit to knowing about, and you’ve got a double winner.”

7). “If I could avoid a single stock, it would be the hottest stock in the hottest industry…”

The Final Checklist (This is not his entire list. The following are merely reminders to

me of things I certainly want to look at).

1). Stocks in General

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A. look at P/E ratio

B. percentage of inst itutional ownership, the lower the better.

C. Insider activity

D. record of earnings growth, look at whether they are consistent or sporadic.

E. Look at balance sheet, debt-equity levels.

F. Look at cash position.

2). Slow Growers - large and aging companies, that are expected to grow slightly faster than the GNP.

A. generally bought for divi dends. Find out how often dividends are raised.

B. look at dividend payout ratio.

3). Stalwarts - Large companies that grow slightly fast er than slow growers. Lynch names a few as Coca-Cola, Bristol-Meyers, Procter and Gamble.

A. Look at price and P/E.

B. Look for possible “diw orsifications” that can reduce future earnings.

C. Look at long term growth rate (CAGR)

D. Look how company ha s faired in recessions and market drops.

4). Cyclicals - Companies whose revenues and profits rise and fall in a fairly predictable fashion.

These are companies, for example, in the airline, auto, steel, tire industries.

A. Look at in ventory. Look for new competition.

B. Look at various P/E. Look at the various cycles of revenue growth and shrinkage, and compare the P/E during those periods.

5). Fast Growers - “small, aggressive new enterprise s that grow at 20 - 25% per year.”

A. Be wary of companies that are growing in excess of faster than 25% annually.

B. Can the company continue its growth rate?

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C. Is the P/ E, near or at its growth rate?

D. few institution s and analysts could be a plus here.

6). Turnarounds - potential fatalities. No growers, "battered, depressed, and often can barely

drag themselves into Chapter 11."

A. Can the company survive the creditors and covenants?

B. Is business coming back?

C. Look at potential and will stockholders benefit from that potential.

7). Additional pointers from Lynch.

A. “Long shots almost never pay off.”

B. “Look for companies with niches”

C. “Look for companies that consistently buy back their own shares”

8). Final Thoughts

A. A sharp mark et decline is the historical norm.

B. market declines are great opportunities to buy stocks in companies you like.

C. Trying to predict the market direction is nearly impossible.

D. You do not have to be correct a majority of the time. I often use the following analogy in investing. If you are playing baseball in the major le agues, and say you have a 20 year career, of which

during that 20 year career, you managed to get an out 67% of the time, you would still probably end

up in the hall of fame for your batting skills and consistency.

E. It takes years to produce big results.

F. Just because the price goes up doesn’t mean you are correct.

G. Just because the pr ice goes up doesn’t mean you are wrong.

H. Selling an outstanding fast grower because its stock seems slightly overvalued is a losing technique.

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I. There is always something to worry about.

J. Keep an open mind to new ideas.

June 15, 2011 Additional Notes for reference.

1). âIâm more interested in how many stocks went up versus how many went down. These so-called advance/decline numbers pain a more realistic picture.â

2). âWhen you sell in desperation, you always sell cheap.â

3). âIn spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as

corporate bonds, and well over thirty times better than Treasury bills.â

4). âIâd love to be warned before we go into a recession, so I could adjust my portfolio. But the

odds of me figuring it out are nil.â âThe trouble is the bells never go off. Remember, things are never clear until itâs too late.â

5). âThey were too busy building shelters for the next earthquake.â Referring if you are too busy trying to protect yourself from a disaster, you will miss the next opportunity. Rarely do the same disasters occur twice.

6). âPredicting the economy is futile.â

7). âPredicting the short-term dire ction of the market is futile.â

8). âHaving an edge will help you make money in stocks.â

9). âIn the stock market, one in the hand is worth ten in the bush.â

10). âI always keep some stalwarts in my portfolio because they offer pretty good protection during

recessions and hard times.â

11). âIf you find a stock with little or no institutional ownership, youâve found a potential winner.

Find a company that no analyst has ever visited, or that no analyst would admit to knowing about,

and youâve got a double winner.â

12). Chapter 18 in 'One Up On Wall Street," The Twelve Silliest (and Most Dangerous)

Things People Say About Stock Prices.

It’s taking too long for anything to ever happen. I scribbled in the book last week, " Microsoft June 2011?"

Lynch writes, “If you give up on a stock because you’re tired of waiting for something wonderful to happen, then something will begin to happen, the day after you get rid of it. I call this post divestiture flourish.”

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Lynch discussed Merck, “which went nowhere from 1972 to 1981, even though earnings grew steadily at an average rate of 14% a year.” “Who knows how ma ny investors got out of Merck because they were tired of waiting. If they kept up on the story, th ey wouldn’t have sold. It shot up fourfold in the next five years.”

âIt takes remarkable patience to hold onto a stock in a compan y that excites you, but which everybody else seems to ignore."

13). The Two-Minute Drill - âI like to be able to give a two-minute monologue that covers the reasons Iâm interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.â

Here are some examples of The Two-Minute Drill:

If itâs a slow growing company â âThis Company has increased earnings every year for the last ten, it offers an attractive yi eld; itâs never reduced or suspended a dividend, and in fact itâs raised the dividend during good times and bad, including th e last three recessions. Itâs a telephone utility, and the new cellular operations may add a su bstantial kicker to the growth rate.â

If itâs a cyclical company â Your script revolves around business conditions, inventories and prices. âThere has been a three-year business slump in the auto industry , but this year things have turned around. Care sales are going up across the board for the first time in recent memory. I notice XYZ models are selling well. There has been cost cutting and earnings are about to turn sharply higher.â

If itâs an asset play â What are the assets and what are they worth? âThe stock sells for $8, but the videocassette division alone is worth $4 per sh are, and the real estate is worth $7. Thatâs a bargain in itself, and Iâm getting the rest of the company for minus $3. Insiders are buying, and the company has steady earnings, and there is no debt to speak of.â

If itâs a turnaround â Has the company gone about improving its fortunes, and is the plan working so far? Describe the turnaround, what has occurred, key elements, such as potential insider buying, logical changes in the business, perhaps a credit upgrade.

If itâs a stalwart - The key issues are the P/E ratio and other metrics. âWhat, if anything, is happening to accelerate the growth rate?â âCoca-Cola is selling at the low end of its P/E ratio. The stock hasnât gone anywhere for two years. The company has improved itself in several ways. It sold half its interest in Columbia Pictures to the public . Diet drinks have sped up growth dramatically.

International drinking patterns are increasing dramatically. The company has bought out many of its independent regional distributors. Now the company has better control over distribution and domestic sales. Because of these factors, Coca-Cola may do better than people think.â

If it is a fast grower - Where and how can the company continue to grow so fast?

14). âElectric Utilities are the major dividend payers. In periods of slow growth they donât need to build plants or expand their equipment and the cash piles up. In periods of fast growth the dividends are lures to attract the enormous amounts of capital that plant construction requires.â

15). Growth Rates - âAll else being equal, a 20-percent grower selling at 20 times earnings is a much better buy than a 10-percent grower selling at 10 times earnings.â

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16). When to sell? )- Pay no attention to external economic conditions, except in a few obvious circumstances when you are sure that a specific business will be affected in a specific way. He gives an example of when oil prices drop; it has an obvious effect on oil drillers, but not on pharmaceutical companies.

Examples of When to Sell

Slow Grower - He mentions he does not own a lot of thes e. He sells when there has been a 30 â 50

percent appreciation, or when the fundamentals have deteriorated. Perhaps the company has lost market share for two consecutive years. Or, there are no new products and research and development has been curtailed. Perhaps acquisitions seem to look like diworsifications. Perhaps the company has gone too much into debt via an acquisition, and the company has gone from no debt to a heavy debt load.

Stalwart - He frequently replaces these with other stalwarts. Look at the long term fundamentals. If P/E gets too high from its normal range, sell it. Other signs might be:

A. Recent new products had mixed results. Or, products in the testing stage are a year

away from the marketplace.

B. The stock has a P/E that is greater than an d not relative to similar quality companies in its industry.

C. No insider buying in the last year.

D. A major division that contributes 25% of earnings is vulnerable to an economic slump which is taking place. (I should have seen this as we were buying financials after the stocks dropped, but before we saw the affect on earnings and such.)

E. The companyâs growth rate has been slowing down, and though it âs been maintaining profits by cutting costs, future cost-cutting opportunities are limited.

Cyclical - He discusses the strange rules of cyclicals, and the need to understand these rules. Best time to sell a cyclical is when something has actually started to go wrong. Costs have started to rise.

Existing plants are operating at full capacity, an d the company spends money to add to capacity.

Obvious signs are the building of inventories. Always pay attention to inventories.

âFalling commodity prices is another harbinger. Usually prices of oil, steel, etc., will

turn down several months before trouble shows up in the earnings.â

Competition businesses are also bad for cyclicals. The outsider will win by cutting

prices, which forces all companies to cut prices, which leads to lower earnings for all producers in the

industry.

Fast Grower - Watch for the end of the second phase of rapid growth. Yet, the trick is not to

lose the potential tenbagger. If you bought the company because your kids love the store or such, and then all of a sudden they say the store is no longer good, look to se ll the company. Or if 60% of the

shares are held by institutions, and three national ma gazines have fawned over the CEO, or if many of the analysts are giving the stock their highest recommendation, then it is time to think about selling.

Look for absurdly high P/Eâs th at reach illogical dimensions.

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Turnaround - Time to sell when the company has turne d around. All the trouble is over and everyone knows it. The company has now become a sl ow growth or cyclical, or whatever. âYou have to reclassify the stock.â Or perhaps debt levels whic h were falling are rising, or inventory is rising at a rate of twice that of Sales, or the P/E is inflated re lative to growth prospects. Most importantly for me to remember, âThe Companyâs strongest division se lls 50% of its output to one leading customer, and

that leading customer is suffering from a slowdown in its own sales.â

Asset Play - âWait for the raider.â âAs long as the company is not going on a debt binge, you will want to hold it.â Other reasons can be dilution, or a company expecting to sell a division for one price, and it sells for substantially less than that. He also cites a material increase of institutional ownership.

3 Likes

Hitesh Bhai,

I am planning to get the book and read it myself. But its interesting to note that the above parameters that lead you to Mayur Uniquoters are indicating towards VOLTAMP TRANSFORMERS except for the 1 point (unusual name of the company).

Below parameters on a superficial levels are:

Some Lynch maxims which applied to this company were:

1). High promoter holding

2). Promoters buying from open markets. Promoters are consistently buying from market

3. Name of the company--

4). 0 debt (can’t say of expansion as they cap is well managed)

5). No research reports/no institutional or fund holding in the company.

All the above were pointers which Lynch elucidates in his book for searching multibaggers.

Just a interesting note. Thought of sharing.

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please share its salient features learnings for deep value investors pramod…

**** "The****

Just finished “One Up On Wall Street”.

As @Donald pointed out in the start of the thread, this one to be the Bhagwadgita of investment for lay investors who do not have too much background in analyzing stocks in detail is very true.

I took the recommendations from VP and did read a few books. But this one was the easiest to understand.

Thank You VP.

Just finished reading one up on Wall Street. Can any VP senior or member post the companies which fit the criteria by Peter Lynch on today’s time? I found Tata elxsi to be one company qualifying the name.