The highly successful track record of Fidelity’s Magellan fund throughout the 1980s made then-manager Peter Lynch a household name. In a recent Globe and Mail article, Validea CEO John Reese outlines the major tenets of the Lynch investment philosophy and the corresponding metrics used to evaluate stocks.
Lynch believed in doing plenty of research before investing and sticking with companies you understand, says Reese, who explains that, while at Magellan, Lynch “honed in on fast-growing companies where the shares were ready to run up.” He describes Lynch’s belief that investing is a long-term game that “requires patience and a fair amount of courage,” adding that investors who didn’t run for the hills during the 2007 financial crisis “ended up recovering their money and even making a profit, depending on how many years they held the shares and when and if they sold any.”
Using his Lynch-inspired stock screening model, Reese identifies the following three stocks that fall within the parameters of this philosophy:
- Taro Pharmaceutical (TARO):The maker of Warfarin, hydrocortisone cream and other prescription and over-the-counter products falls in to the “fast grower” category, and its price-to-earnings of 7.9 compares favorably to its 46-per-cent growth.
- Gamestop (GME):This manufacturer of video-game consoles and components is a “slow grower” by Mr. Lynch’s definition, but boasts a favorable dividend yield. While the S&P 500 average is currently around 2.3 per cent, Gamestop’s yield is 6.1 per cent.
- Amtrust Financial (AFSI):A provider of workers’ compensation and other insurance products for small businesses, Amtrust has five-year average earnings per share growth of 27.4 per cent, well within the range Mr. Lynch set for sustainable growth.