Find Out the Story
When looking at different companies and cases, you need to find out what kind of investment case it is. Essentially, find out the story!
A lot of things get easier when you know what the story is. It gets easier to know what you are looking for when researching a company, follow-up the company, and probably most important, when to sell the shares.
To make it easier, we borrow Peter Lynch's categorization of companies. Overall, Lynch's categorization of companies provides investors with a helpful framework for thinking about the different types of companies they can invest in. By understanding the characteristics of each category, investors can make more informed investment decisions and build a well-diversified portfolio that suits their investment goals and risk tolerance.
Peter Lynch 6 different types of companies
Slow grower
The first category of companies, according to Lynch, are slow growers, companies with limited growth prospects but consistent performers. These companies typically have low PE ratios, high dividend yields and are often in mature industries. Examples include utilities, food, and beverage companies.
Stalwart
Stalwarts are large, well-established companies that have consistently grown their earnings and dividends over time. They may have some cyclicality but are generally seen as reliable, steady performers. Examples include blue-chip companies like Coca-Cola, Johnson & Johnson, and Procter & Gamble.
Fast grower
Fast growers are companies that have strong growth prospects and are reinvesting their earnings into expanding their business. They may be in emerging industries or have a unique product or service that is in high demand. These companies often have high PE ratios and low dividend yields. Examples include tech giants like Amazon, Facebook, and Google.
Cyclicals
Cyclicals are companies whose performance is heavily influenced by the economic cycle. They tend to do well when the economy is growing but can struggle during recessions. Examples include companies in the automotive, housing, and manufacturing industries.
Turnarounds
Turnarounds are companies that have been struggling but have the potential to improve their performance with changes in management, restructuring, or other strategic initiatives. These companies often have low PE ratios and a high potential for growth if they can turn things around. Examples include companies like Ford, Delta Airlines, and JCPenney.
Asset play
Asset plays are companies that are undervalued because of their assets, which could include real estate, patents, or other valuable assets. These companies may not have strong earnings or revenue growth but may be good investments if the market is undervaluing their assets. Examples include real estate investment trusts (REITs), timber companies, and pharmaceutical companies with valuable patents.
It is no size fits all here. Some companies belong in maybe two och are 50/50 in two. Also, companies evolve from being fast to slow growers to hopefully a stalwart of worse at the beginning of a turnaround. It is a good framework for understanding and building an investment story around a company. But especially important for you to understand from where the value creation will come in the company you research or own.
Conclusion
Find out the story as the first thing when you look into a company. It will further down the line help you with a bunch of things when you are laying the puzzle to understand the company. Peter Lynch´s six different company categories are very usable as a framework for the different stories it could be.
Popular posts
Peter Lynch´s checklists for finding 10-baggers
10 free or cheap sites to do better financial analysis
Thanks for reading Investacus! Subscribe for free to receive new posts and support my work.
I want to highlight that SaveLend has a bonus for net deposits during April! You get a 2 % I bonus when you make a deposit of up to 10 MSEK.
SaveLend is an investing platform that offers investors the to invest in credits since 2014. Investing in credits is good diversification to an equity portfolio and creates a stable return in your portfolio.
7-9% in return a year
Great diversification to an equity portfolio
Offers many different credit types for you to diversify your credit portfolio
You can sell your credits on the secondary market
SmartInvest to invest automatically for you!
Start investing in SaveLend today by clicking the button below and get €20 or more when you invest at least €500!
