Peter Lynch Categories of Stocks: 6 Types of Stock to Pick

Lim, Do Yeub

(From investopedia)

             A lot of people are interested in trading stocks nowadays. Although we study hard about the stock market, it is hard to win in the market. However, it’s indeed helpful to know what kinds of stocks there are. There are many methods of classifying stocks, but I want to share the method of Peter Lynch. Peter Lynch is a well-known investor in Wall Street. In the past, he took over a fund by paying 20 million dollars. During 13 years under his management, the size of the fund grew up to 14 billion dollars. It is about 660 times larger than it was before. Because of his achievement as a fund manager, he is known as a legend in Wall Street. When he decides whether to invest or not, he always classifies stocks into 6 different categories. They are slow growers, stalwarts, fast growers, cyclical, turnarounds, and asset plays.

             The slow growers are the stocks people commonly recognize as a major firm. They usually grow a little bit faster than GNP(Gross National Product). They were fast growers in the past, but as they develop, the rate of growth becomes slow. A stock price mostly moves softly and barely fluctuates. Profitable industries nowadays can no longer be profitable after several years. An example of the slow growers nowadays is electric installation.

             The Stalwarts are also large firms that most people already know, but they grow more rapidly than the slow growers. Peter Lynch said even though it is hard to expect a great capital return, it is a good option to include some stalwarts in the portfolio. He always includes some stalwarts in his portfolio. It is because they usually grow steadily during a boom period and don’t drop a lot or just hold. They positively affect the profitability of the portfolio.

             The fast growers are his favorite stocks. They usually have 20~25% of an annual growth rate. They are new firms that show great enthusiasm for their growth. He advises that if you can pick just 1~2 fine fast growers, investment will be a huge success. However, it is riskier to invest on fast growers than on slow growers or stalwarts. Even though it is more dangerous, he still thinks the fast growers are the best options in the stock market.

             The cyclicals are stocks that can be easily predicted by the economic cycle. Firms which deal with cars, airplanes, tires, steel, and chemicals are examples of the cyclicals. During a boom period, they even grow faster than the fast growers. On the other hand, they struggle during a dull period. When investing in the cyclicals, it is important to consider the timing.

             The turnarounds include firms which have experienced decline and are trying to revive. They don’t grow at all, which is even worse than the slow growers. Because they are more likely to be bankrupted, it is the riskiest decision to invest on the turnarounds. Nevertheless, it might be a good option if you believe one of the turnarounds will revive. It is likely to be faced away from the market, so there is a chance of buying cheaper.

Last ones are the asset plays. They mostly have a tremendous amount of assets such as real estates and intangible assets. He says it is sure that there are hidden firms which own valuable assets. In order to judge whether a firm is one of the asset plays, it is important to think carefully about how assets will affect the firm’s benefits.

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