Small aggressively-run companies offering earnings growth of at least 20% per year can be 10- to 40-baggers, and even the 200-baggers, if you can buy them when they are unrecognised by Mr Market and therefore still cheap. If you get things right in this area, one or two of these can make a career.
Niche companies are Peter Lynch’s preferred type of value investment. He looks for companies which are strong in their balance sheets and profits while they are growing.
The difficult thing when valuing them is to figure out is when growth will fall to more pedestrian levels. This is where the amateur can have a distinct advantage over the professional, who dares not take the initiative and make the first move - they wait for someone else to take the plunge.
Wall Street analysts and managers all watch each other thereby losing out by jumping on the bandwagon too late. Dunkin’ Donuts was a 25-bagger for Lynch between 1977 and 1986, but not until 1984 did any professional analyst turn their attention to it.
When Stop and Shop was about to grow its share price from $5 to $50, there was only one analyst taking any interest in it, yet IBM had 56 analysts following its progress.
Boring and unpleasant is attractive
One of Lynch’s favourite places to look for multi-baggers is in boring or unpleasant industries; these types of industries attracted little attention, and could be severely under-priced as a result.
If everything about the company seems boring – it name, its activities and its management – then it may be overlooked.
The oxymorons, labelled “professional investors”, will simply not see it until finally the flood of good news compels them to start taking an interest. As the crowd starts to do this it becomes trendy and overpriced. Then you can sell your shares to the trend-followers.
The key criteria
Lynch focuses on certain ele
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