Notes – One Up On Wall Street (#peterlynch, #gaarp, #tenbagger, #stocks)

One Up On Wall Street

by Peter Lynch, published 1989, 2000

The Final Checklist

The following note outline was rescued from my personal document archive. The outline consists of a summary of Peter Lynch’s classic contrarian/growth investing book, One Up On Wall Street. The notes are a series of checklists to go through when considering Peter Lynch’s various stock categories.

Stocks in General

  • The P/E ratio; is it high or low for this particular company and for similar companies in the same industry?
  • Institutional ownership percentage; the lower the better
  • Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.
  • The record of earnings growth to date and whether the earnings are sporadic or consistent
  • Whether the company has a strong balance sheet (debt to equity ratio) and how it’s rated for financial strength
  • The cash position; net cash per share can place a floor in the price of the stock

Slow Growers

  • Are dividends always paid and are they routinely raised?
  • Percentage of earnings paid out as dividend; a low number provides a cushion and protects the dividend in hard times

Stalwarts

  • These are big companies that aren’t likely to go out of business. The key issue is price, and the p/e ratio will tell you whether you are paying too much
  • Check for possible “deworsifications” that may reduce earnings in the future
  • Check the company’s long term growth rate, and whether it has kept up the same momentum in recent years
  • If you plan to hold forever, see how the company has fared during previous recessions and market drops

Cyclicals

  • Keep a close watch on inventories and the supply-demand relationship; watch for new entrants into the market which is usually a dangerous development
  • Anticipate a shrinking p/e multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are acheived

Fast Growers

  • Investigate whether the product that’s supposed to enrich the company is a major part of the company’s business
  • What the growth rate in earnings has been in recent years
  • That the company has duplicated its successes in more than one city or town, to prove that expansion will work
  • That the company still has room to grow
  • Whether the stock is selling at a p/e at or near the growth rate
  • Whether the expansion is speeding up or slowing down
  • That few institutions own the stock and only a few analysts are covering it

Turnarounds

  • Most important, can the company survive a raid by its creditors? How much cash does the company have? How much debt? What is the debt structure and how long can it operate in the red while working out its problems before going bankrupt?
  • If it’s bankrupt already, what’s left for the shareholders?
  • How is the company supposed to be turning around? Has it rid itself of unprofitable businesses?
  • Is business coming back?
  • Are costs being cut? If so, what will their effects be?

Asset Plays

  • What are the value of the assets? Are there any hidden assets?
  • How much debt is there to detract from these assets?
  • Is the company taking on new debt, making the assets less valuable?
  • Is there a raider in the wings to help shareholders reap the benefits of the assets?